Adaptive reuse in commercial real estate

Last month, our Research & Intelligence team noticed an uptick in client research requests related to “adaptive reuse” of commercial real estate. With this subject at the forefront, LAC’s Caterina Corazza decided to write a blog post on this topic for other interested parties.

A building or a canvas? How commercial real estate is changing

“Adaptive reuse” sounds like a dry topic. But as soon as I started digging into it, I found it is emerging as an incredibly dynamic part of the U.S. real estate market.

Adaptive reuse is the practice of repurposing a building to suit different needs. This is relevant in the current economy because a significant inventory of commercial real estate is underutilized – with an uncertain future demand scenario. At the same time, there is a great deal of innovation happening across the country. These current trends are creating new opportunities – and risks – for developers and investors.

Understanding the market and building a strong business case

There are many creative solutions to the problem of underutilized buildings. Some are converting hotels into student housing, assisted living facilities, or affordable housing. Others are transforming retail space into mixed use (residential, office, retail), warehouses, fulfilment centers, and even vertical farms. Data collected by the National Association of Realtors provides some examples of the subsequent use of vacant malls. Understanding where the demand growth is – and what’s driving that growth – is an essential first step.

When determining if your project makes sense from a commercial perspective, you should also be aware of the regulations that could help or hinder your project. In New York, for example, there is an exemption in the Climate Mobilization Act for buildings with rent stabilized units. On the other hand, if you’re looking to convert a retail space into a warehouse, the municipality might be reluctant to downzone the site. In California, proposed legislation aims to encourage commercial-to-residential conversions.

Finding the right building for the job

If you’re buying a new car, you generally know what to look for – security features, mileage, etc. But do you know what to look for in an older building? Some buildings can look very appealing and be well located, but require so much investment that your project might not be commercially viable.

If the project is done right, you may only have to make a few changes. But those changes can have great effect. An example from Chicago is the conversion of television studios into a new cultural and social center, the Chicago Public Library (West Loop Branch). This example of adaptive reuse won the 2020 AIA Award for Interior Architecture. One of the reasons the building received the award is “warmth from reuse of existing materials.”

If you’re looking to multifamily development, knowledge of tenant/customer trends and expectations is essential, particularly as preferences have changed even within the past year. Developers are currently emphasizing space (larger apartments, with balconies and terrace space), location (away from dense areas), and hygiene (contactless entry, air circulation). With an older building, you might save on the cost of building a new structure but spend more than expected on amenities and ventilation. On the plus side, multifamily is one of the most sought-after asset classes in real estate, because it performs comparatively well from an investment standpoint.

Mind the gap! Connecting public, private interests

Adaptive reuse makes sense where your project meets a need in your community – whether a commercial or a social need – and where your local government is onside. As mentioned, there might even be government incentives available, if your development incorporates certain social objectives.

This is an evolving area of municipal and state policy, as lawmakers are trying to find solutions that address social problems while preserving local governments’ tax base. Both government and business are trying to adapt, as quickly as possible, to the challenges brought by the COVID-19 pandemic while not sacrificing other policy objectives such as the mitigation of climate change.

Keep an eye on any changes that might help you bring underutilized buildings to life, because there are plenty of good reasons to do just that.