🧰 Developers are flipping old prisons. Here's how.

👋 Hello, Best Ever readers!

In this week’s newsletter, developers flip prisons, Trump’s tariffs threaten CRE, and big-box industrial dominates.

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Let’s CRE!

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CRE HEADLINES

💰 Trump’s Wealth Fund: President Trump signed an executive order this week directing officials to create a plan for a U.S. sovereign wealth fund. The planned $900 billion fund would leverage $5.7 trillion in federal assets and could mirror funds that have been significant CRE investors since 2008.

📦 Big-Box Domination: Large industrial leasing was dominated by big-box deals in 2024, with nearly half of the top 100 leases being signed for more than one million square feet. The average size of top leases, however, dropped slightly to 968K square feet in 2024, down from 987K in 2023.

📈 Affordability Spike: Affordable housing completions are expected to peak at a multi-year high in 2025, reaching 78,377 units, 12.6% higher than 2024, according to a Yardi Matrix report. This momentum, however, may be short-lived, as 2026 deliveries are set to fall to 64,745 units.

🧽 Record Absorption: The U.S. multifamily market posted record-breaking absorption in Q4 2024, with 183,600 units absorbed — a 118% jump from 2023. Annual absorption hit 530,600 units, double the previous year's figure and approaching the 2021 record.

💥 Conversion Explosion: Office-to-apartment conversions have exploded since 2021, with the pipeline growing 484% from 12,100 to 70,700 units by 2025. The surge comes as work-from-home trends leave offices vacant while housing inventory remains tight, sitting 25% below 2019 levels.

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DEVELOPERS ARE FLIPPING OLD PRISONS. HERE’S HOW.

In this brave new CRE world where investors have to be more creative than ever to get deals done, we’ve seen just about everything converted to mixed-use and multifamily — office buildings, hotels, and even baseball stadiums.

Add prisons to that list. After a massive prison-building boom that added over 1,000 facilities between 1970 and 2000, the trend has reversed dramatically since 2010. Nearly 200 state and federal correctional facilities have closed from 2000 to 2024, driven by sentencing reforms and drug decriminalization. Municipalities and developers are now converting these old prisons into multifamily and mixed-use communities.

Case Study: The Liberty Crest Apartments in Fairfax County, Virginia — formerly the Lorton Reformatory — is an example of a successful prison-to-residential conversion. Built in 1910, the prison closed in 2001, and Fairfax County purchased the 2,400-acre site for $4.2 million.

• The Conversion: The county converted former cellblocks and added new structures to create 165 apartments (which are 98% leased), 157 townhomes, and 24 single-family homes, along with commercial spaces.

• Preserving History: The project features original prison signage and includes the Lucy Burns Museum, which documents the site's past. The development also preserved much of the original architecture, including bricks made by prisoners themselves.

• Promoting Affordability: While the property features luxury units, it also emphasizes affordable housing, with select two-bedroom rents ranging from $1,600 to $2,500, aligning with local averages. 

• Modern Amenities: The development also features a swimming pool, 24-hour gym, and yoga room. The remaining acreage hosts a park, golf course, three schools, and an arts center.

A Growing Trend: Liberty Crest isn’t an anomaly. Manhattan's former Lincoln Correctional Facility is being converted into an affordable housing complex. A mixed-use development is planned at the 100-acre Downstate Correctional Facility site in New York’s Hudson Valley. And in Utah, the 600-acre Utah State Prison site is being redeveloped into "The Point," a dense development with thousands of housing units, a rail station, and an innovation district.

Challenges: Like any redevelopment, prison conversions don’t come without hurdles. Many facilities are in rural locations, miles away from economic activity, making them unattractive for redevelopment. There are also construction challenges, as the conversions often demand heavy renovations. Gaining control of properties from state governments and getting community approval can also be difficult.

WHAT IT ALL MEANS

As with any trend, community leaders and investors alike are keeping an eye on prison conversions. Michigan City, Indiana, for instance, has a prison set to close within the next few years. Due to its unusually prime location, redevelopment could unlock a new future for the town, which has suffered from a declining population. Either way, the fact remains that — with a vision and the team to execute it, and a little help from the city and the surrounding community — anything these days is fair game for a conversion.

_{🎟️ BEST EVER CONFERENCE}
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• A HUGE Opportunity for LPs: Not only can you access our new accredited limited partner ticket for 25% less than general admission, but you can vet sponsors and deals face-to-face to find what's worthy of your capital in 2025. Plus, you’ll get access to special events like GP-LP Speed Networking.

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💪 Start your 2025 investing year strong by joining other experienced, driven, and collaborative investors looking to do the same.

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FALLOUT FROM TRUMP’S TARIFFS

President Trump followed through on his campaign promises this week, levying tariffs against China, Mexico, and Canada. Mexican and Canadian imports were hit with 25% tariffs (except energy from Canada, which will face 10% tariffs). These have been delayed for a month due to new border security deals. Meanwhile, China was hit with additional 10% tariffs. 

These tariffs present significant challenges — and some possible benefits — to CRE investors, depending on what you invest in and where.

Construction costs are likely to rise significantly, given that:

• Mexico and Canada supply 25% of U.S. building materials (concrete, cement, roofing, steel, glass, windows, lumber, aggregates, aluminum, and asphalt). 

• China produces 54% of the world's crude steel and supplies 20-25% of common materials like building stone and cement.

Higher construction costs could force developers to charge more for new construction, resulting in higher rents upon completion. The potential for tariffs to slow projects and increase housing costs has prompted the National Association of Home Builders to push for a tariff exemption on building materials.

The Inflation Factor: Tariffs are widely considered among economists as inflationary. If tariffs reverse the downward trend on inflation by increasing the cost of goods, we can expect the Fed to stand pat on interest rates for the foreseeable future.

• The higher cost of goods also threatens to have a disproportionate impact on several states, especially border states, as companies pass higher costs along to everyday Americans. Based on current trade, the tariffs as issued would have an estimated $232.7 billion national impact. That impact would be largest for businesses in Texas ($47.1 billion), California ($32.6 billion) and Michigan ($27.8 billion).

Still, the tariffs don’t come without potential benefits for some CRE investors.

• Industrial real estate could see increased demand due to the onshoring of manufacturing.

• Existing property owners may benefit from higher construction costs as they increase the value of existing buildings by raising replacement costs.

• Some developers and existing property owners could also benefit from projects being canceled due to cost increases, reducing competition.

Overall, the tariffs present yet another headwind that promises to bring a mixed bag of varying impacts on commercial real estate in 2025 and beyond.

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FROM 55% VACANCY TO A $1.8 MILLION SALE

Steven Weinstock and the team at WE Capital took this mixed-use property from 55% vacancy to a $1.8 million sale.

Here's how they did it 👇

🏢 Property Details: This 10-unit mixed-use property was purchased in August of 2018 and is located in Roselle, New Jersey. It consists of six office suites and four retail spaces.

💸 Finances: The property was purchased for $1.25 million. The team raised $425,000 in capital and secured a $900,000 loan with a 4.2% interest rate and a five-year term with interest-only and no pre-payment penalty.

💼 Business Plan: The property was owned by the bank at the time of purchase. It was 55% vacant but in great shape. Steven and his team were able to complete the purchase and get the bank to hold a mortgage on the property as well.

They spent about $50,000 refreshing the office suites and one of the retail units with upgrades to paint, flooring, electrical, HVAC units, doors, and common areas. They successfully leased out all 10 spaces. One of the retail units was leased to a regional chain, the others to a hair salon, a fish market, and a check-cashing business.

🍾 Results: Investors received a 6% annual return in the form of quarterly distributions. The property was refinanced in 2020 and WE Capital returned all investor equity plus an additional $120,000 that was shared with investors in the form of a 60/40 GP/LP split. They then sold the property in late 2023 for $1,875,000.

If you have a deal you'd like to feature here, respond directly to this email with “deal breakdown.”

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FREE DOCUMENT DOWNLOAD

How an Investor Raised Over $1M for His First Two Real Estate Syndication Deals

If you were brand new to the real estate syndication niche, it’s unlikely that you’d be able to raise over $1 million for your first deal — heck, even your first few deals. But Dave Thompson managed to do just that by using his personal network. Here’s how.