Commercial Investment Real Estate September/October 2019 | Page 29

Legacy
Buildings:
Raze, Rehab,
or Repurpose?
Strong demand for space in the industrial market is helping mask growing challenges emerging with
functional obsolescence of older buildings.
Although a clear pricing differential exists across newer Class A industrial versus older B and C
stock, many older buildings can be more costly to operate due to lower ceiling heights, which reduce
the cubic storage capacity, as well as higher energy costs. As more users embrace technology,
automation, and robotics, it raises the question of what to do with aging industrial facilities.
In some cases, the answer is repurposing them for new uses, known as adaptive reuse. “There has
been an attrition of sorts in the Class C market,” notes Nathan Anderson, CCIM, SIOR, a partner at NAI
Heartland in Kansas City. Industrial warehouse and manufacturing facilities built in the 1950s and 1960s
that were either multistory or had low ceilings have been demolished or repurposed to other uses such
as multifamily. As those options have diminished, tenants have moved up to Class B buildings, which
has helped fill vacant space left by tenants relocating to newly built facilities, he says.
“You see developers getting creative and turning that industrial building into an office building,
multifamily lofts, or a brewery,” says Cedric Matheny, CCIM, a principal and vice president at Atlanta-
based T. Dallas Smith & Company. Atlanta is home to a large stock of legacy industrial buildings that
are now being transformed by adaptive reuse. Examples of new uses range from loft apartments and
creative office space to film production areas to serve the city’s growing film industry.
The trend of converting, razing, or redeveloping close-in industrial properties is occurring across
major metros. “It’s a matter of improving these spaces on a functional level, if they have lower
clear heights and no truck maneuvering,” says Sean Durkin, CCIM, MSRE, SIOR, principal at Lee &
Associates in Seattle. However, some older facilities that have a desirable close-in location are still
sought after since demand remains high for space that is an easy reach for last-mile delivery. For
example, users will pay a premium for space that is close to the Port of Seattle, even if that means
making do with an older facility, Durkin says.
Tenants willing to pay up for close-in industrial facilities make a strong case for repositioning
existing assets. According to research from Prologis, rents in the world’s leading infill submarkets
have nearly doubled in the last five years, and the firm expects that outsized growth to continue.
“Older properties often suffer from low clear heights, limited fire protection, and limited circulation.
However, properly located older assets can overcome the lack of features,” says Kim Snyder,
president of the West region at Prologis.
Prologis has several examples where it has been able to successfully rehab a Class B or C property
with fresh and modern offices, or remove sections of a building to enhance trucking and circulation.
Growing occupier demand for modern industrial facilities located within easy reach of population
centers will continue to push investors to look at creative solutions for aging industrial stock.
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