Builder Turns Developer
Careful planning mitigates the risk of a spec building project.
Daniel Murray of Murray Building Co.
Photo by Steve Gates
When Daniel Murray opened Murray Building Co. in Birmingham five years ago, he did not plan to become a real estate developer, building vacant office space “on spec.” He intended to act only as a builder, taking other people’s ideas off the drawing board and turning them into bricks and mortar.
But in early 2008 he saw an opportunity that he couldn’t resist: an empty 6,000-square-foot concrete and masonry building in Homewood. “This project was a completely personal thing: myself, my father, my brother-in-law, and his brother,” says Murray. “We decided to buy the property and transform the building on it into a 10,000-square-foot building that would have 80 percent office space and 20 percent retail space.”
As in any real estate development, location was a key factor behind Murray’s decision. The site was near downtown Homewood but in an area that was not well developed. It seemed like an up-and-coming neighborhood, attractive for office space. In addition, there was good access from the front of the building, an advantage for retail leasing.
When it came to getting a construction loan, these factors were in his favor, but other factors were probably decisive. Murray had a major tenant lined up for the future building, one that would occupy 30 percent of the space, so the project was not totally speculative. Furthermore, the tenant, “Twin Construction,” was owned by one of the partners, Murray’s brother-in-law. “So you could say that the building was partly owner occupied,” Murray says. “That may have been one reason why the bank was willing to make the loan.”
Further keeping the project in-house, Murray’s own construction company made the alterations to the building, almost doubling its size by adding a two-story section onto the existing structure.
What to do with the interior of the new section was a matter of some discussion. “As we got towards the end of the work, we were trying to figure out what to do with the space inside before showing it to potential tenants,” he recalls. “One option was to build it all out, spec it out on the inside, putting in walls and bathrooms. Another way would be to shell it out, just put up studs and sheetrock and give the tenant flexibility to do what he wanted with it. We ended up building some walls on the ground floor of the new addition, and as we were nearing the end of that process, a tenant came in and really loved the design we had built. They did want a couple of changes, which we were glad to accommodate.” Now the building had two tenants, between them occupying half the total space.
For the upper floor of the new addition, Murray put in an office suite with small individual spaces for many different tenants. As he hoped, once he built it the tenants did come—a lawyer, an architect, a media company and others. The only unoccupied part of the building was the 2,000-square-foot portion in the front, which Murray had planned as retail space. This too was soon leased, first by a cabinet showroom, and later by a cookie company, which is still there.
For Murray’s team, success came from starting with a general plan and letting the details evolve as the project progressed. Having a small, tight-knit group of investors simplified the decision making process, as did the fact that Murray’s own construction company did the building.
Murray believes that the most important factor for building on spec is to choose a good location, which will mitigate the risk of initial vacancies by giving some assurance that in the long term, tenants will come. Also, it’s important to partner with a good construction company, preferably one that has a vested interest in holding down costs and making the project successful.
Even so, Murray feels fortunate in beginning his development prior to the economic downturn in 2008. “There’s no question that it was much easier to get financing then,” he says. “Federal regulations have tightened and there are some new ones, too. When you talk to the banks now they might say, ‘It’s not that we don’t want to lend you money. We can’t lend you money.’ Also, there is a lot of vacant rental space out there, so you are competing against depressed lease rates in existing office space. On the other hand, construction costs are down, and if you can get a loan, you can get a stellar interest rate. Back in 2008, we got a bank loan with 30 percent guaranteed occupancy. Today you would probably have to show 80 percent.”