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Commercial real estate can be categorized in many ways, but one category we rarely discuss with clients is the option of investing in a special purpose building. These real estate offerings are often considered high-risk, especially if they do not currently have a leased tenant, but they can also be a golden opportunity if chosen wisely.
In this article, we’ll discuss the benefits and potential risks of investing in special purpose buildings and how you can determine whether one is right for you.
Special vs. General Purpose Buildings – Which is Better?
A special purpose building is roughly defined in real estate as a building that is specifically designed for a narrow pool of tenants. A food-grade industrial site, for example, may have features useless to most other manufacturing facilities, such as washable walls or floor drains, making it less appealing to any potential renter other than those in the industry. A general-purpose building, in contrast, is built to meet the demands of many clients, from office buildings to retail stores, restaurants, and a variety of other tenants.
While general purpose buildings are made to be modified regularly to meet different tenant needs, a special purpose building is designed specifically for one industry. Therefore, while they can be renovated, the cost to rewire these buildings is significant. Thus, if you are to invest in a special purpose building, the type of tenant you’re looking to attract needs to be carefully researched.
The obvious upside to investing in a special purpose building is that tenants are unlikely to leave. The building is designed so specifically for their needs that they are unlikely to find others in the area that can perform as well. However, if there is a vacancy, you run into serious issues. Often it is more profitable to scrap the building entirely and sell the land than trying to remodel a special purpose building into a general one – which you almost never want to do.
That being said, general-purpose buildings are typically the go-to for investors looking to invest heavily in commercial real estate. Like this recent Legacy retail listing, general-purpose buildings can easily be modified to fit a variety of tenants in different niches. So, while you may attract similar tenants based on location, building size, and amenities, you can provide a more flexible offering when a current lease expires, or a tenant goes out of business.
The Best Types of Buildings to Invest In
If you are provided an offer to invest in a special purpose building, there are some “green flags” you can look for to determine whether it will be a positive investment long-term:
- Long-term leases with current tenant
- Tenants with a stellar reputation in their industry
- Tenants in recession-proof industries such as pharmaceutical, medical tech, and foodservice
- Well-performing tenants with few other locations in the state
Legacy Commercial Group offers a variety of options for our clients, from general-purpose retail sites to specialized commercial developments and so much more. If you’re interested in finding commercial real estate in either of these categories, contact your Legacy representative today.