Opportunities exist for commercial real estate development.

THIS WEEK, noted real estate attorney, Jennifer Messado, shares her views with Sunday Business on the commercial real estate market in Jamaica.

Sunday Business: What is happening in the commercial real estate market now?

Jennifer Messado: There is a tremendous shortage, especially in New Kingston, where there are very few empty spaces. That said, I don't see where things will get any better. The required returns are just not available.

Currently, the average commer-cial rental is US$10 to US$12 ($600 to $744) per square foot after maintenance. But new construction needs US$18 to US$20 ($1,116 to $1,240) per square foot to become profitable. That is why you are not going to see significant office buildings in New Kingston.

Outside of New Kingston, there are opportunities for developers to build office spaces.

Commercial office space can be built for $1,000 to $2,000 per square foot. And it can be resold for $8,000 per square foot. And that is because you are only giving the tenant a box. They have to design the space to fit their needs and stand the cost.

Just look at the Liguanea Post Office. That is more of a service and office centre than a straight retail shopping centre.

SB: So, what are the other options available for commercial real estate investors?

JM: Retail shopping centres are something to look at. The rental return is US$16 to US$20 ($992 to $1,240) per square foot. Therefore, my advice to pension funds and other institutional investors would be to build shopping plazas. With the right location and right rental mix, the rental and income growth is limitless.

Two good examples of that are Island Village in Ocho Rios, where the rental is US$24 ($1,488) per square foot and the Village/Mall Shopping Centre on Constant Spring Road, where the rental is US$12 to US$16 ($888 to $992) per square foot.

SB: What areas of opportunity in the real estate market do you see being neglected by investors?

JM: Lots. One area not being addressed is the development of lots. There are a few around, but the market is demanding more. I had a client who had 200 lots near the Highway in Portmore selling for $840,000. Those lots sold off in two days. What developers can do is partner with a builder and provide building options to purchasers. The additional benefit of a land subdivision is that it requires less capital and so it is a wonderful opportunity for developers.

Another area is the renovation of existing properties. Three examples that come to mind are the apartment complex of Westbury on Trafalgar Road that was once the Jehovah's Witness Watch Tower building.

Then there is MegaMart on Waterloo, which was the old Gore tile factory, and then there is the old Cifuentes cigarette factory on the Boulevard, which was turned into the Boulevard Plaza by the Lee family.

With a renovation, the approval time is cut in 25 per cent. Additionally, construction time and costs are lower, because you are not starting from scratch. Hence, the return on investment is more attractive.

SB: What is happening in the rest of the island?

JM: Let us look at the tourism markets where in-bond merchants are leading the development push.

In St. James, there are the shops at Rosehall. This development is geared at taking the tourist shoping experience out of the city centre, where the tourists are harassed. It will be a first-world development in which all the in-bond merchants will be equity holders. The rental there will be US$25 ($1,550) and up per square foot.

Another St. James development will be at the Montego Bay Freeport. They want to do a similar concept like Island Village, where they catch people as they come off of the cruise ship. This development will be a total experience where casinos, restaurants and shopping.

In Westmoreland, another in-bond merchant, will be building a plaza on the Negril strip on the other side of the beach. The objective is to give the tourists something to do after they sun bathe. The rents there will be over and above existing markets.

SB: With the development push by the in-bond merchants, are there any opportunities for investors not currently in the market?

JM: Even though people say tourism is seasonal, we have reached a point where we have a steady market. And so, smart investors would look at providing activities for tourists. That is adventure tours, casinos, restau-raunts and shopping ­ all in a first-world environment and with first-world service.

SB: Any final thoughts on the commercial real estate sector?

JM: I would like to see banks becoming more involved with financing developers. This would require hard work on their part and hiring people with the relevant finance and real estate background.

You see, with residential developments, the building societies give buyers a mortgage and that pays off the developer - end of story.

With a commercial develop-ment, paying off the developer does not mean an end to the banking relationship. Once a retailer takes over a space, he/she will need financing to outfit it. For example, a supermarket that is an anchor tenant of a plaza requires about $30 million to properly furnish with lights, fixtures and shelving. So this creates an opportunity for long-term financing. But this opportunity cannot be done from behind a desk.

Bankers have to get out there and work for the business.

Published: Sunday Gleaner | September 11, 2005