Post #339: More on Maple Avenue valuations and investment

Posted on August 7, 2019

One oddity of Maple Avenue retail property is that  little of it is advertised as being for sale.  That’s an oddity, if you think there is some sort of crisis in retail.  But not if you think that returns on current investments appear reasonably good.  If the returns are adequate, sales should be infrequent, if only to take advantage of the tax-deferred nature of the investment: Capital gains taxes only have to be paid upon sale of the property.

In any case, my internet search turned up only three advertisements for Maple Avenue retail property for sale.

As noted in Post #319, the combined Starbucks drive-through and Just Tires properties are being offered for sale at $961 per retail square foot.  (See this reference for the ad.)  From that ad, you can infer something like a $60/sq ft/year rental on the retail space.

The two medical office buildings at Maple and Center (where the Sunrise assisted living was proposed):  $7.5M, $682/retail square foot, at this link.

The Princess Jewelers shop, 527 Maple Avenue West, $1.7M, calculated as just over $500/square foot, at this link.

And that led me to thinking about what is and isn’t a feasible investment under existing C1 zoning.

And here, I’m not thinking of just rehabbing existing space.  We know that buildings along Maple are being rehabbed and repurposed all the time.  So that level of investment clearly appears profitable.  A few recent examples finished or in the works include:

  • Taco Bell –> Starbucks;
  • Magruders –> restaurants;
  • Dead gas station –> gas station plus convenience store;
  • Coldwell Banker offices –>  Wawa
  • Pro Feed Pet Supplies –> Ramen restaurant
  • Sandy Spring Bank –> Animal hospital

I could go on.  The point is, there is no lack of examples for redoing existing space.  (And this doesn’t even count the cosmetic make-overs of various shopping center fronts up and down Maple.)

But a more serious question is, how profitable might new construction be?  We have seen some new construction (Sweet Leaf, 2010) in living memory.  But not much.  Is that because it’s sufficiently profitable to remake existing buildings, or is that because it’s just not profitable to build something new, along Maple, under existing zoning?

Obviously, I’m not a builder.  But let me try a rough cut at a pro-forma calculation.

What could be done under existing commercial zoning?

Probably the main drawback of Maple as a retail zone is that many of the buildings made more sense in an era with lower rents and lower land prices, for a different mix of uses.  It’s not that the buildings are old, or that retail can’t succeed on Maple.  Buildings can be modernized, and retail appears to be doing well.  It’s that new construction, under existing commercial zoning, would likely put more retail square footage on each lot, and would avoid some retail uses all together.

My favorite example here is banks.  Nobody needs a big bank building any more, and certainly, nobody needs a big parking lot to handle (what used to be) the Saturday morning rush.  But in an earlier era of lower land prices, there was no barrier to locating a small bank on a big lot with ample parking.

For example, the now-closed BB&T at 415 Maple Avenue West.  Based on Fairfax County tax records, the bank building is a mere 2600 square feet, on a nearly 40,000 square foot lot.  It has (by my count) 19 parking places, which is about 50% more than required by the zoning.  You can either say it has a spacious look, or you can say that in the context of modern land prices, that wastes a lot of land.

Now do a little thought experiment:  Could that property be replaced by simple single-story retail, at a profit, assuming the retail space could be rented?

IMPORTANT NOTE:  This next analysis completely ignores the main point of Post #333, which is that the Town apparently now judges that a building with two floors of housing, over one floor of commercial space, is “principally” a commercial building, and not housing.  In other words, based on the 901 Glyndon precedent, the Town has already given the green light to using our commercial zone for three-story mixed used buildings with two floors of housing over ground floor retail.

But here, I’m going to pretend that’s not true.  I’m going to ignore the profit potential of those two additional floors of housing that now appear feasible under existing commercial zoning.  Instead, I’m just going to do a quick cut of whether you could profitably convert that BB&T bank lot to a single-story shopping center.  (I’m not claiming that’s the most profitable use.  I just want to ask whether that investment would pay for itself.)

The Jades shopping center is across the street (and east a bit) from this property.  The retail square footage for Jades is about 30% of the total lot.  Taking that as the model, the BB&T lot would support about 12,500 square feet of single-story retail with surface parking.

If that new retail building could command the same price as the current Starbucks/Just Tires, that new building would sell for about $12M.  Duly noted, the price asked for the Just Tires/Starbucks appears high by Maple Avenue standards.  Our other two data points above are about $700 and about $500 per retail square foot.  The $500/square foot building is not really the best space on Maple.  But taking the $700/square foot as a viable price, a new 12,500 square foot retail building would sell for about $8.75M.

Near as I can tell, land on Maple is selling for around $6M an acre in the post-MAC era.  I’d guess that half of that is speculation on building the much larger, much-more-valuable MAC buildings.  But it is what it is.

So that would leave about $6M to build the building, at the Just Tires/Starbucks valuation, but only about $2.75M to build the building at the lower Maple and Center medical office building valuation.

Various on-line cost estimators give estimates for retail space construction cost of a 12,500 square foot one-story retail building.

Clearly, this is a rough cut.  Clearly this does not account for risk.  Clearly this assumes “build it and they will come” — that the mere fact of building new retail space will create new retail tenants.

That said, round numbers, ignoring the two floors of housing that you could stack on top of this shopping center — looks like it would be profitable enough to attract investment.

Bottom line:  If the published valuations of Maple Avenue retail are anywhere near correct, it looks like these properties are valuable enough that they would attract new investment, even under the old-fashioned interpretation of our existing C1 code.  A fortiori, then, if the Town now allows builders to add two floors of housing as a matter of course, it … sure seems like investment in new buildings on Maple should be feasible.

Obviously, three floors under existing commercial zoning would likely NOT be as profitable as four/five floors 54-62′ tall under MAC.  But the point is, it is not clearly un-profitable to build under existing zoning.  Particularly given the 901 Glyndon precedent.