- On June 7, 2017
The world of commercial real estate is ever changing. Why? Because the world we live in is ever changing. Advancement in population, tastes, labor markets, and technology require that commercial assets continue to adapt.
Unfortunately, the items required to keep up with tenant needs would dictate that buildings with historic or societal value be removed in order to provide the necessary square footage for new development.
Luckily, commercial real estate investors have a third option, one that falls neatly between historic preservation and demolition.
Adaptive reuse is a process which allows investors to take an old site or building and renovate for a purpose other than the one for which it had been built. Although this term has been recently associated with the gentrification of many urban core markets across the United States, it is a process which can be used on almost any type of building and in any market.
The examples below are four methods to use adaptive reuse on different property types. Although the process of adaptive reuse allows for any type of asset to be converted to another, the four options were chosen either for the ease in which they can be completed or due to the higher possible return on investment.
Hotel to Apartment:
Although the hundreds of apartment conversions which sprang up over the past decade have proven that any property can be converted into either apartments or condos. Hotels are considered, by many, to be the ideal candidate both financially and with regard to time.
This is due to the fact that hotels are built with many of the same requirement as apartments. Water lines for bathrooms and self-contained heating and air conditioning systems (commonly known as a PTACs) are all requirements of any hotel property. Therefore, all an owner would need to consider is how to restructure the number of units to provide tenants with additional living areas including family rooms and kitchens.
In the case of extended stay hotels, where a kitchen and additional living areas are a featured amenity, there is often little to no required renovations.
Retail to Office:
Although retail centers can have office-like retail tenants including banks, insurance vendors, etc., this type of conversion is focused on repurposing vacant anchor spaces to suit the needs of larger corporate office tenants with an employee base anywhere from 100 – 10,000.
This process can be an answered prayer for powers centers which have lost big box tenants with anywhere from 40,000 – 400,000 sq. ft. Big name office tenants looking to consolidate their operations into one centralized location have found these spaces to meet their needs without the high price tag experienced in downtown markets. Lower rent rates, ample square footage, plenty of parking, and access to public transportation are all qualities which these tenants are looking for when searching for a corporate campus location.
The renovations and upgrades required to convert these former super centers into office spaces tend to include high dollar items such as HVAC, plumbing, electrical, and mechanical along with low dollar items mainly in the construction of walls to divide the open space into separate units.
Warehouse to Mixed Use:
The flight of large manufactures to countries with cheaper labor left many investors with upwards of 500,000 square feet in vacant warehouse space and no potential replacement. The blight caused by these properties on the landscape of urban areas demanded that a new purpose be determined and quickly.
Luckily, mixed use developments have assisted in not only curing the void left by the loss of these tenants but in changing these dilapidated areas into high dollar neighborhoods.
Mixed-use is an all-encompassing term used to identify a property which features two or more categories of commercial use in one location at the same time.
Although it may seem like there is no limit to the potential of these properties, there are certain property uses which cannot occupy the same space. This is normally with regard to industrial uses which might pose both a health and safety issue if mixed with any uses including residential or hospitality.
What makes vacant warehouse space the ideal candidate is that it presents developers with a blank slate to repurpose in a way that can insure the highest return on investment. There are also many incentive programs established by the municipalities given to these type of projects. These programs will offset some of the conversion costs in an attempt to cure the issue of urban blight.
As with the previous example, the required construction for this type of conversion is much more extensive. However, it is also one of the only effective methods to cure vacancy for these spaces long term.
Office to Hotel:
Converting an office building into a hotel can be one of the most expensive types of conversion. However it has one of the highest potential returns.
Often reserved exclusively for either urban markets or secondary markets with a heavy concentration of Class A office tenants, these desirable locations allow owners to choose between higher ranking hotel brands. These brands generally carry higher regard allowing franchisees the opportunity to capitalize on higher average daily rates (ADR).
One way to help curb the high costs of the office to hotel conversions is ifhe intended property has any historical significance, an owner will have the potential to avoid hundreds of thousands if not millions in franchise mandated property improvement plans (PIP) so long as these renovations interfere with the preservation of the properties architecture or ambiance.
This type of conversion requires a large amount of capital be invested toward the beginning of the project, often due to zoning regulations that require mechanical and HVAC systems be upgraded to meet a higher standard.
If you would like to explore these and other methods for ensuring the best return on investment for your current or future commercial assets, please join us at an upcoming Commercial Property Academy Live Event. We will cover not only how to evaluate whether a property meets the necessary requirements for adaptive reuse but also how to work with local governments and financial institutions to ensure you can capitalize on any asset. But seats are filling up fast, don’t miss out!