Commercial Investment Real Estate July/August 2019 | Page 18

A N A LYSIS
Looking
for a Redo
A
s competition for developable land within certain
asset classes increases, along with changing demo-
graphics and land use trends, opportunities to repur-
pose older and functionally obsolete properties are
becoming increasingly attractive. Many developers are recog-
nizing the value in reconfiguring obsolete properties for vastly
different uses than originally designed — such as transition-
ing from hotel to office, retail to multifamily/mixed use, and
industrial to live/work.
Adaptive reuse is more than repositioning a tired retail center
or re-tenanting office space; it’s realizing a complete re-envision-
ing of a building without complete redevelopment.
This process requires a creative eye and can offer many advan-
tages for developers and investors. There may be less pricing
pressure, because otherwise obsolete or underperforming assets
have less competition than easily entitled development land or
less complex value-add deals.
The timeline for adaptive reuse projects can be shorter than
ground-up projects; in some cases, it presents an opportunity to
preserve and upgrade a historical property. This can unlock value
in an asset that may otherwise be difficult to redevelop under
restrictions from local government and residents for preservation.
That said, as with any real estate investment, critical fac-
tors must be considered when determining whether to tackle
an adaptive reuse project and deciding what new use(s) may
be appropriate.
Evaluate Market Trends
Understanding market conditions — including macro trends in
demographics, land use and zoning, and as-designed and pro-
posed use — is critical to successful adaptive reuse.
Shifting market dynamics have increased the viability of
these projects, particularly in areas undergoing densification,
losing manufacturing, and where retail assets are outdated
and underutilized.
16
July | August 2019
Adaptive reuse projects come
with plenty of considerations,
so when do such investments
make sense?
by Peter McIntyre
For example, e-commerce has lessened the need for traditional
regional malls and department stores, while increasing demand
for industrial buildings of all sizes to address distribution, regional
logistics, and last-mile concerns.
In high-demand urban areas, underutilized industrial buildings
may be suitable for live/work or experiential retail and mixed use.
The San Francisco Ferry Building, shown above, is an example
of an iconic property, obsolete for waterfront warehouse or com-
merce use, that was transformed into prime retail, dining, and
community space.
Changes in consumer habits have led to the continuing need to
reinvent retail and reposition older shopping centers. Consumers
expect malls to provide experiences — including entertainment,
dining, and gathering spaces — rather than just places to shop.
This trend creates opportunities for department, apparel, and
big box stores to be converted into programmable spaces, food
halls, movie theaters, and exercise studios. In recent years, prior
manufacturing properties have been successfully converted into
creative uses; former hotel space has been turned into unique
offices; and obsolete retail locations have become office space.
Recent opportunity zone legislation may spur additional adap-
tive reuse projects in areas that may not have received investor
attention otherwise. The legislation helps communities seek
investment in blighted or underserved areas of the country,
increasing consideration of creative adaptive reuse investments.
Because “substantial improvement” is required to realize oppor-
tunity zone tax benefits, repositioning obsolete buildings for new
and better use could be on the rise.
Determine Feasibility
Feasibility analysis is critical in determining viability of any real
estate investment. Given the unique challenges of repurposing an
existing site, the feasibility process needs to be more rigorous for
adaptive reuse, examining factors such as location, demographics,
community needs, and zoning.
COMMERCIAL INVESTMENT REAL ESTATE
INVESTMENT