Commercial Investment Real Estate September/October 2018 | Page 12

MARKET
FOR ECAST
A former Sears facility, The Crosstown Concourse in Memphis, Tenn., now
features multifamily, office, and retail space, as well as Crosstown High School.
Reusing the Old
Innovative cities are making adaptive reuse competitive
with new construction.
hough it’s been garnering headlines for more than a
decade, adaptive reuse (AdRu) is no longer just about
enticing millennials by repurposing beautiful historic
properties in primary markets. A variety of new projects
has surfaced in secondary and tertiary markets, where investors
see AdRu as a driver of net operating income and yield.
T
New Drivers of AdRu Activity
Why are we seeing more AdRu projects in this market cycle
than in any other cycle since World War II? Factors such as the
trend toward urbanism and millennial lifestyle choices, including
a focus on real estate “experiences,” have been reported on for a
decade or more. But other pressures deserve a closer look.
Cost and scarcity of land. Unlike the suburbs, which have
a plentiful supply of cheap land to scrape and erect new struc-
tures, cities tend to have a variety of barriers and limited supply
of undeveloped land. This forces developers to reconsider an
existing use. Increasingly, the cost to repurpose an old or unoc-
cupied property is cheaper than site acquisition, permitting and
approval processes, and ground-up construction, given rising
materials prices and scarce construction labor. This would only
be exacerbated by an extended trade war.
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September | October 2018
AdRu now competes effectively against new construction. It
can be faster and 15 to 20 percent cheaper for projects without
environmental issues in cities that have sufficiently evolved their
zoning and building codes to accommodate it. The wild card is
the cost of the permitting, engineering, and approval. Commu-
nities like Tucson, Ariz., have started to proactively supplement
their zoning ordinances and building codes to provide for some
of the unique allowances needed to encourage AdRu activity.
Reinvention of retail and remaking of the supply chain.
E-commerce and new logistics technologies are reinventing
retail. This now affects everything from apparel to electronics,
as well as autos and, more recently, groceries. The changing use
of retail space is creating most of the space currently available for
AdRu, followed by obsolete warehouses.
Combating blight and replacing the tax base. Unutilized
structures are creating blight in markets across the U.S. How
can cities replace lost sales and property tax revenue from closed
stores and financial institutions? Ironically, the solution is what
local communities least understand and most resist: reusing a
structure or property. In the coming years, local governments will
invest more economic seed capital in this area to help eradicate
the blight.
COMMERCIAL INVESTMENT REAL ESTATE
by K.C. Conway, MAI, CRE