The Best Opportunity for Church Real Estate
by Nathan Artt, on September 2022
While real estate is harder to find, we're presented with an opportunity to use our buildings in ways we haven’t thought of before, not just to create income opportunities, but to activate our sites for community use.
Often our greatest opportunities lay in hiding behind our greatest challenges. This could easily be one of those times. While our in-person models are changing, interest rates are increasing almost as fast as construction prices. Real estate is harder to find. Yet, this presents us with an opportunity to use our buildings in ways we haven’t thought of before, not just to create income opportunities, but to activate our sites for community use.
For the past few years, we have been writing a lot about how the role of our buildings will change, but not their value. We spent a lot of time on this in our case study: Target Corp and the Flexible Church as we saw Target move from closing stores in 2014 to announcing the opening of 500 stores in 2019 as a result of a change in their thinking.
As the Church of the Future is emerging from the ashes of COVID, attendance on Sunday morning is not the only significant change that we have been facing. Due to an unbelievable and almost unprecedented labor shortage and rise in raw material costs, the cost of buildings has increased by an astronomical amount since the onset of COVID. Despite the cost of construction increasing by more than 30% in two years, the housing market has exploded due to a lack of supply and an ever increasing amount of demand. The increase in the housing market has trickled over into the commercial arena, as multifamily (apartment) developers are now paying record prices for the same land and vacant buildings that churches are pursuing. And if that wasn’t enough, in an effort to curb inflation, the Fed has increased interest rates by a record amount with more rate hikes predicted to occur before the end of the year. Other than that, how was the play, Mrs. Lincoln?
Churches have always been notorious for scope, cost, and schedule overruns, and this market is simply exacerbating this issue. We are hearing story after story this year of church projects coming in 40% to 50% over budget. Yes, you read that right (insert a shameless plug for having professionals manage your largest capital investments). Real estate is harder to find and buildings are more expensive. Churches are getting priced out of the market. For years we have been talking about the opportunities for churches to activate and monetize their sites for weekly use, bringing the community around them in, and creating real estate that is as relevant as it is reverent. This also creates the opportunity for buildings that fund ministry, and not just ministries now spending more to fund buildings. What was a foreign concept just a few years ago now represents more than 75% of the emails and phone calls we receive from churches.
Here is the interesting news and one of our greatest opportunities…. Churches are not the only organizations who are getting priced out of the market.
Two years ago, we were calling on childcare operators to look at our clients’ buildings and almost having to convince them it was a good idea. It worked. We have churches all over the country bringing in six figures in rent for the family ministry space they’re not using during the week. But now? Child care operators are calling us looking for opportunities to partner with churches. Why?
Just like churches, child care operators are being priced out of the market. On top of that, their model is changing as well. Because of the hybrid office/work environment, more people are working from home more often and now require fewer full-time hours for child care. Child care operators were building 10,000SF to 12,000 SF buildings all in for $6M to $9M. Those same developments now cost $9M to $12M if they want to be in their target market of areas heavy with young families (aka the markets that the majority of thriving churches are in or are targeting). They are also competing with multifamily developers who are paying $700k to $1M per acre and paying record-high construction costs. In short, their capitalization costs have increased significantly, their model is changing, salary requirements are higher due to the labor shortage, and the tuition rates have not kept up with the cost increases. Sound familiar?
Even though churches and child care operators have been essentially building the exact same space for the exact same target market for years, the two industries have not wanted to play together. Both wanted too much control of the space to let someone else cohabitate, even though the two operators use the same space at different times.
There is an enormous opportunity within this challenge. If childcare operators can lower their basis (cost to enter a market), it allows them the opportunity to pay near-market rents (which are at an all-time high) and even put in some money on the front end to make adjustments to the space. This allows the church to potentially bring in anywhere from $150k in smaller markets to upwards of $400k per year in more densely populated markets.
Another major added benefit to this is an alleviation of staff costs to the church. Because child care costs are so high right now, most staff people working at the church are struggling with paying for childcare, which in turn puts more burden on the Church to increase salaries to keep up with the cost of living. The US Bureau of Labor and Statistics shows that 2 million women left the workforce since COVID listing the cost of child care being the #1 reason for doing so. Child care operators are also offering discounted rates to church staff as a part of the lease negotiations.
All this being said, the concept behind this works, but it is also rife with nuances. How do you structure a lease? How do you ensure that the space will get turned over well for Sunday morning? Who are the right childcare operators? How do you navigate a selection process? What about liability? Property tax? Income tax? Governance and tax structure? Operating agreements? Can we use the space at all during the week? Do we care if the childcare operator is faith-based or not? What about signage, utilities, wayfinding, branding?
Here is where I would like to encourage you. This is NOT the old-school church-owned childcare idea (that adds frustration and very little income). This is about bringing in the best childcare operators in the country and having them pay to be in your space. While putting the deal together is not simple, the concept is. The good news? We know some folks who have experience in this very thing (shameless plug #2)
Let’s talk a little about the opportunity. Let’s say the market lease rate is $30/SF, which means that you can likely get $20-$25/SF PLUS potentially another $5-$6/SF for Opex (janitorial, utilities, taxes, property management, etc.) for a lease of your family ministry space. If you have 10,000SF, that comes out to $260,000 to $310,000 per year. Then, most leases include an annual graduation of 2.5%, which means that those numbers increase by 2.5% every year. By year 15, that same gross lease would have paid out between $4.2M and $5.4M. The best news, to me, is that this income is for space you potentially already have, or space you are already planning to build. I mean, what could your ministry do with an extra couple hundred thousand dollars per year, per campus?
We’ve said this many times before, but this goes beyond money. When the church adopted buildings in the third century or aula ecclesiae, churches weren’t just in the center of town, they were the center of town. They were activated sites, used by the community all the time. This is about creating more margin for ministry, yes, but it’s also about creating opportunities to serve the community around you, regardless of what all the people in your community believe.
Are you interested in unlocking your space? If so, we’re interested in investing some time into you to walk through how that might be possible and what all might be involved. Just click on the link below to schedule your Free Analysis, and we’ll get something set up with you very soon!