Flip or Flop: Five Tips to Evaluate a Second Gen Space
You already know that thinking about and planning for the cost of construction is a fundamental step in opening your retail space. We talk about buildout costs all the time at Pedal, and one challenge that we often encounter is the common misconception that a “second generation” space is always going to be a less expensive endeavor.
First, a little real estate vocab lesson. “Second generation” spaces are those that were previously built out and have already housed an operating business for a period of time -- sometimes for many years, and sometimes only briefly. So while it may seem that a “second gen” space would afford a quick and cheap way to get in and start operating, looks can often be deceiving, and you really have to dig a little deeper.
Can a second gen space ever be an amazing budget-friendly solution? Of course! When the space is also turnkey -- meaning it’s either exactly or really, really close to exactly what your business needs to operate effectively. This is more often the case for non-food retailers like boutiques where there are minimal utility requirements. For businesses that need specific plumbing, electrical, and mechanical connections (ahem, anything involving cooking) finding a turnkey space is a whole lot harder.
Here are five tips to help you think critically about a second gen space.
Tip 1: Slow Your Roll and Look Critically
Veteran project manager Sarah Steel, Principal of Steel Management Group, put it well in saying that new retailers need to “take off the eagerness blinders and put on the logic hat.” These “eagerness blinders” go by many names -- some positive, like enthusiasm and drive, and some dangerous, like naivete or ignorance. However you look at it, eagerness blinders are real and instead of feeling ashamed or embarrassed, we should embrace the reality that first timers are new to the process and both need and deserve trustworthy guidance and education. Okay, off my soapbox, and back to the blinders.
Retailers, when you take off your eagerness blinders, you can approach a space with critical eyes. And when you put on your logic hat, you can assess what your critical eyes see against the needs of your business and budget. The truth is that in most cases, there are plenty of retail spaces out there that may work for you, but if you’re wearing eagerness blinders, you’re just temporarily hiding from the realities of the space that 100% will require your attention (and your money) at some point.
Tip 2: Check Your Use
What is your “use” of a space? Use is not just how you’re planning to use a space, it’s also a really important term that your jurisdiction is going to require to permit and license your buildout and business. If your “use” is foodservice, and you’re considering a second gen foodservice space, you can probably assume that the existing buildout and rules governing what kind of business can operate in that space are going to work for you.
But what if you’re a yoga studio with plans to operate a juice bar in the front of the space? If you’re considering a second gen yoga space, you may run into problems later if your jurisdiction says that your space is not approved for foodservice (yep, juice is foodservice).
In addition to your “use” you have to consider how your brand fits with the second gen space you’re inheriting. Are you trying to open a play place for kids? Is your second gen space in a basement? Do your customers want to take their kids to play in a basement? How much money is it going to cost to make that basement not feel like a basement? Could that money be better spent building out an empty space with more natural light? These are the questions to ask.
Tip 3: Check the Original Date
Robert Mescolotto, Owner of Hospitality Construction Services Inc., likens second gen spaces to eggs -- they have a natural expiration date after which they’re just not good anymore. According to Robert, three to five years is about the threshold after which second gen spaces start to really spoil. Ready-built spaces that are in good condition, up to code, and in need of only a cosmetic update are the unicorns, and they are really better understood as turnkey. Second gen spaces that fall outside of this ideal can often end up as full gut jobs, since it’s cheaper and simpler to tear it all down than it is to modify something that doesn’t work as is.
Back to the three to five year threshold -- not only does the wear and tear on the space and its systems start to show as the years pass, but there is also increasing likelihood that building codes may have changed and the existing systems may no longer be compliant, requiring time-consuming and expensive upgrades. It’s incredibly frustrating to your timeline and budget to expect to reuse a system, like a grease interceptor for example, only to find out that your county has changed requirements and is requiring an upgrade.
Finally, second gen spaces less than five years old are more likely to have architectural and engineering plans that someone close to the deal can actually locate. Think about scouring the beach for a treasure chest with a metal detector. Wouldn’t it be easier if you also had a treasure map? So many of the critical systems (plumbing, electrical, and mechanical) are literally hidden from view -- under the floor, inside walls, above the ceiling -- that an actual map of the systems is beyond helpful when you’re working with a second gen space. As time passes, properties change hands, property managers change jobs, and architectural and engineering plans can get lost in the shuffle.
Tip 4: Kick The Tires AND Look Under The Hood
So assuming that you’ve left your enthusiasm blinders in the car and you’re prepared to look critically at a second gen space, it’s important to reeaally look. There is a lot that you can see with an untrained eye, but you should absolutely, positively have an experienced retail construction partner helping you evaluate any space you’re seriously considering.
In a long and expensive process, here’s a piece of great news -- finding a good contractor to come out and review your space is usually free. You need a commercial general contractor with retail and/or hospitality experience. Do not call your uncle Jeff who is a residential contractor. Do not call your brother’s friend who remodeled her own kitchen. Construction costs (materials and labor) are pretty fixed, so you’re not saving yourself any pain or money to skimp on your construction partners. This is absolutely the time to value experience in building for your type of use and working with permits and inspections in your jurisdiction.
Once you have your construction partner check over the space and give you big picture feedback, they will likely ask to review any work letters that you’ll negotiate with your landlord. Say yes. Work letters, tenant improvement allowance, delivery dates, rent commencement dates...these are among the many negotiable elements of an LOI that translate to cold, hard cash when it comes to buildout time.
Chris Deluca, Principal of MPC and National Tenant Advisor at Sabre Advisors, recommends involving your construction partners while you’re still evaluating multiple sites and having them thoroughly check over any second gen spaces you’re considering. At a due-diligence minimum, your team should determine that the existing utility sizing is sufficient and the mechanical systems are in working order. Also, if you’re a restaurant, you should contract a hood maintenance vendor to check over the fire suppression, grease duct, and venting systems. If there are problems with any of these big-ticket items, you don’t have to abandon the project, but you should add this information into the mix of your LOI negotiations, since improvements or repairs on these items are material to your buildout budget and overall financial deal.
Tip 5: Talk About Your Budget
Leave the weird “let’s not talk about money” thing for dinner with your in-laws. Talking openly and often about money is absolutely essential to managing a buildout, because guess who is going to end up paying for it -- emotionally and financially -- in the end? You. So get over your discomfort with telling your partners (brokers, designers, architects, and contractors) how much you can spend on the buildout, and be open. When everyone has the relevant information, they can more effectively and efficiently find, design, and build a space that you’ll love.
Is your budget $4,000,000? Great. Is your budget $400,000? Great. Experienced architects and building professionals know how to work with a range of budgets, but they can only deliver what’s going to work for you if they understand the true parameters of your budget. Everyone has budget constraints on some level, so don’t feel like your budget is an indicator of your worth. Everyone involved in your project wants you and your business to be successful, and success happens across the budget spectrum.
An experienced construction partner can pretty easily give you an assessment as to whether the second gen space you’re considering is going to work with your budget, or if you’d be better off starting with a cold, dark or vanilla shell space. They’ve seen a lot over the years and are invaluable resources when it comes to making smarter decisions.
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Last summer I bought a dress on an amazing sale online. It was a $560 dress marked down to $140. Final sale, obviously. When it arrived, the proportions were all off, and it took two trips to the tailor and $130 to get the dress to fit properly. See where I’m going here? I did get a $560 dress for $270, but if I had planned to spend $270, I may have been a lot happier with a totally different dress. Lame example, but you get the point. When it comes to second generation spaces, the devil is always in the fit out. So look clearly at your options, be open about your budget, and rely on your team to be sure that you’re making the right decision for your business and your future.
