by Alex Griffin
Investment Associate | Beman Group
Blanchard and Calhoun Real Estate Commercial Division
You’ve no doubt been to some of downtown Augusta’s new restaurants or entertainment locations: Edgar’s Above Broad, Miller Theater, Pineapple Ink Tavern, etc. You’ve probably also seen a lot of vacant buildings, just sitting empty with no lights on and making downtown look like a strange hodgepodge of thriving and dying. A lot of people don’t understand why more buildings aren’t renovated, and I hope to explain those challenges below and what we can do to help mitigate those challenges.
The main reason for the lack of new development or renovation is the gap between rental rates and construction costs. Building a new building in Augusta (depending on building type and quality of finishes) can range in cost from $85 per square foot up to $250+ per square foot. During the past couple of years, costs have continued to rise for raw materials and labor—some reasons being shortage of labor, tariffs, and plant closures. Renovating a building downtown can sometimes be more expensive than building new. Yes, you have existing foundation and walls, but until an owner starts spending money investigating, they won’t know about the quality of those items or other systems, like plumbing, roof, or electrical.
Costs are one piece of the problem, whereas rental rates are the other. Leases can be structured as gross/full-service, meaning the tenant only pays rent (and maybe utilities) or can be structured as net, meaning the tenant pays everything (including taxes, insurance, etc.) on top of rent. All-in, rental rates in downtown can vary from $15-$22 per square foot, depending on the particular building and quality, length of lease, and tenant quality.
Let’s look at an example. Suppose an investor was looking to purchase a 4,000 square foot building for $200,000 (that’s $50/sf) and the costs to renovate a building are an additional $100/sf (may include new flooring, roof repairs, HVAC, walls, and paint). The owners total “basis” in the deal is now $150/sf, or $600,000. To generate a financial return that makes sense for the investor, they’d typically want a 15% return, meaning they need to net $90,000 in rent after expenses. On a 4,000 square foot building, the rental rate that achieves that return is $22.50 per square foot! In order to make the project worthwhile, the investor needs to either lower their return expectation, or find a way to lower the costs (we will discuss that in our next blog!).
This gap between rental rates and construction costs keeps investors—or current property owners—from investing in their buildings. Most of the recent projects downtown have all been executed by “end users,” meaning they are the ones occupying the building. Here is a list of companies downtown who own their own building and have invested heavily in renovations: Milestone Construction, Wier/Stewart, Showpony, LOOP Recruiting, TaxSlayer, Pineapple Ink Tavern. In order for downtown to continue to grow, more end users will need to purchase and renovate buildings, thereby reducing supply of available buildings, leading to an increase in rental rates. Until rental rates can catch up to construction costs, downtown’s resurgence will continue at a slower-than-desired pace.
This slow resurgence is exacerbated on the 7th block of Broad because of the size of these buildings. The largest buildings in downtown—Lamar Building, JCPenney, Richmond Summit Apartments, Marion Building—are all on one block and would take significant upfront investment to get the buildings in a leasable condition (meaning pre-leasing is extremely important!). Look for this block to be one of the last ones to improve and for investors to rely heavily on government incentives like the Federal Opportunity Zone and Historic Tax Credits.
Contact Alex Griffin or the rest of the Beman Group for more information on Augusta commercial real estate, downtown projects, or investing.