Industrial

Industrial Rebirth

Manufacturing and Warehouse Properties Take on New Lives in a Variety of Uses.

Reminders of another era, the vacant warehouses and factories that still dot urban landscapes across the country are dwindling. However, rather than falling prey to the wrecking ball, these properties are inspiring creative redevelopment. For instance, a long-abandoned cotton mill becomes residential lofts, a historical steelworks emerges as a $300 million mixed-use retail facility, and a former shoe machinery complex is converted to 1.4 million square feet of research and development and flex/office space.

These projects are examples of an escalating national trend. Often less risky than speculative new construction, industrial redevelopment is attracting investors and tenants that find these buildings can offer key advantages in a rigorously competitive commercial real estate market.

Old Becomes New
Many developers have found success through the innovative use of vacant industrial space.

Industrial buildings that have outlived their usefulness to industry, such as those with ceilings too low for the new racking systems or access limitations for today's 18-wheelers, often are perfect for conversions to loft offices, loft condominiums, and mixed-use projects if relevant environmental issues are addressed.

Numerous attributes make many vacant industrial buildings attractive redevelopment candidates, including proximity to major transportation hubs and thoroughfares, high parking ratios, architectural interest, potential for open-plan layouts, and high ceilings. Industrial sites also usually are near water lines, sewage systems, roads, and utility lines.

Industrial buildings in urban areas with little available class A office space and soaring rental rates are prime targets for conversion. For example, demand for office space in the tight Boston market has prompted numerous industrial redevelopments from simple retrofits to complete knockdowns. With class A office space averaging rents of $30 per sf outside the city, conversions of vacant industrial buildings are economically viable. As a result, close to 10 million sf in the area has been or will be converted.

In areas that retain thriving industrial activity, such as northern and central New Jersey, aging industrial properties are being refitted to meet the needs of a changing market. For instance, redeveloping these buildings for flex users often is a viable, cost-effective alternative to new construction.

For instance, new multistory office product can cost $110 psf to $160 psf or more to build from scratch, according to the CoStar Group, and single-story flex/office industrial space can run $80 psf to $100 psf to build new. If a property's shell is serviceable, the interior of an existing single-story industrial building could be finished for an office user for roughly $30 psf to $40 psf.

Property owners are able to market flex buildings to telecommunications, pharmaceutical, and Internet companies, as well as light distribution or assembly companies that may need different spacing configurations.

In other areas, owners of old industrial buildings try to compete with newer buildings by upgrading their facilities. In the greater Detroit area, which is a center for bulk warehousing, industrial redevelopment consists of improving existing buildings. In such markets, price wars can erupt as renovated older buildings and newly constructed properties struggle to attract tenants.

The opportunity to push the creative envelope in designing office space from these converted facilities is considerable motivation for some companies. In Portland, Ore., an old ice storage building is being redeveloped for a national advertising agency. The ad agency plans 60,000 sf of office space with top-notch amenities, including its own basketball court.

The prospect of efficient and profitable leasing opportunities also drives many industrial redevelopments. For instance, a former Saks Fifth Avenue warehouse in Manhattan's meat market district seemed to have limited leasing potential until the marketing team capitalized on the industrial character of the cinder-block building. Recognizing the “workhouse chic” appeal of the property, the brokers targeted a number of new-media and arts-related businesses.

The brokers leased the property for a limited amount of redevelopment commitment by the owner. The project was successful, as average rental rates for the space increased from between $10 psf and $12 psf to more than $30 psf.

A 33-acre former General Motors factory in California's San Fernando Valley offered favorable demographics for a mixed-use project with a considerable retail component. Outperforming expectations, the retail properties achieved a 98 percent preleasing commitment.

Redefining the Landscape
Industrial redevelopment outside of the nation's central business districts takes on a grander, more diffused focus. A growing number of examples of ambitious mixed-use projects reconceive sites that once were hubs of burgeoning industrial activity. Once completed, the projects can change the entire landscape of the area.

For instance, the old Stapleton Airport is located just six miles from downtown Denver on a 4,700-acre site that housed about 150 buildings, including hangars, warehouses, concourses, and office space. Redevelopment plans for the site call for 17 million sf of new commercial space and up to 10,000 units of housing to be developed over the next 15 years.

There are provisions for 1,680 acres of open space, containing formal parks, natural creeks, and flood plains; an outdoor sports complex; golf courses; and an agricultural center. The remaining acreage is slated for sale and already has given rise to one business complex, as well as attracting a United Airlines flight center, a production studio, and a sports club. The redevelopment is in various stages of completion.

Similarly, the former Union Pacific station outside of Salt Lake City is being adapted by Gateway Computers as a large-scale, mixed-use complex. Around the defunct station, 380,000 sf of office space, 700,000 sf of retail space, and 500 residential units will be built. It is expected that office space will become available in summer 2001, with additional space coming on line in 2002. Total anticipated costs for the project have been cited at $375 million. The station itself will be converted to a museum and the historic district will include a cultural center and a 300-room hotel. The scope of the project has encouraged developers in adjoining areas to redevelop smaller warehouse and manufacturing facilities into loft buildings, clubs, retail centers, restaurants, and design centers.

Government Intervention
As the industries that once occupied these sites declined, often so did the economy of the surrounding communities. But redevelopment of industrial buildings brings commerce to dormant districts and revitalizes communities. The success of many industrial redevelopment projects across the country has led the government to become the catalyst for future projects. Municipalities often identify and package industrial redevelopment projects as they vie for the attention of development capital.

To solicit redevelopment activity, government agencies have generated a series of initiatives and incentives. Some are designed to attract particular types of business, some are designed to provide relief for necessary environmental cleanup, and some ease zoning restrictions or offer tax abatements.

For example, the Environmental Protection Agency funds a pilot program that awards up to $200,000 per project to combat and resolve real or perceived contamination of sites. In addition, the Brownfields National Partnership Action Agenda attempts to foster cooperation between public and private organizations in a coordinated strategy to address brownfields. The plan has commitments from more than 15 federal agencies, representing a $300 million investment in brownfield communities, with an additional $165 million in loan guarantees to help remediate up to 5,000 properties.

Regional Roundup
Industrial redevelopment activity in several regions shows in more detail how such projects are playing out nationwide.

Atlanta. The urban-living movement is breathing new life into many of the functionally obsolete industrial properties in Atlanta's central core. Growing demand for high-tech office space and call center space in midtown Atlanta, combined with the resurgence of in-town living, is driving most of the current industrial redevelopment.

Conversion projects in the Atlanta area have done very well. Over the last decade, a number of warehouses in the Chattahoochee industrial district profitably have been converted to discount retail facilities, most of which are open for business only on weekends. This is standard practice for rurally situated, wholly retail facilities.

However, more aggressive redevelopment activity has occurred lately. The Carriage Works conversion to high-tech office space and the King Plow Arts Center with lofts and studios were really the groundbreaking redevelopments and quickly were fully leased.

The success of these projects has been duplicated time and again in and around the city. A number of projects currently are in the early stages of development.

Boston. The aggressive market has turned to the adaptive reuse of outdated manufacturing and warehouse facilities in the Boston area. What was once a Hewlett-Packard manufacturing facility is being converted by Equity Office Properties into 500,000 sf of office space that is expected to lease for around $36 psf. Equity also has gutted an old Jordan Marsh warehouse in Newton, Mass., to develop an additional 500,000 sf of office space that is expected to lease for $34 psf plus electric. The building is now known as Riverside Center.

Wellsford Commercial Properties and Parametric Technology Corp. are redeveloping Polaroid's local warehouses into new office space. Wellsford bought both warehouses for $28.4 million. The developer demolished the 217,000-sf warehouse and built a 212,227-sf office building called Cutler Office Park 1. The average lease rate is $30 psf plus electric.

Wellsford sold the second warehouse to Parametric Technology for almost $30 million. Parametric is converting the 261,400-sf warehouse into a 400,000-sf headquarters campus.

Pittsburgh. The Homestead Works in Pittsburgh offers an example of a waterfront industrial redevelopment. Waterways were instrumental in serving the manufacturing economy of the country's industrial era. As the economic base shifted, the banks of rivers and bays have been scarred by the progression. Developers and municipalities have been reclaiming these areas, and with the success of the first such projects, many across the country have followed suit.

A landmark of the country's labor history, the Homestead Works was arguably one of the most important steel mills in the country, producing armor plates for battleships and steel cable for the Empire State Building and the Oakland Bay Bridge. The series of plants located up and down the Monongahela River once employed 15,000 workers during World War II.

Now, Continental Real Estate Cos. and Nationwide Insurance Enterprise have teamed to build a retail entertainment center that will contain a movie theater, two shopping areas, restaurants, office buildings, residential units, and a marina. The development plan is huge in scope, focused around a 700,000-sf power center with an additional 500,000 sf of specialty retail entertainment, 650,000 sf of office space, and 500 to 700 prospective residential units.

Target demographics in the communities surrounding the planned complex and spanning both sides of the river are attractive to big-box retailers and national chains. The three municipalities that intersect the complex expect a boost from the influx of commerce and are stretching to provide the infrastructure necessary to support such an ambitious project. At a cost totaling $300 million, parts of the project are slated for opening this spring.

Sacramento, Calif. California's capital is attempting to revitalize its industrial market by redeveloping its declining railroad corridors. Sacramento's economy was strongly tied to its rail system during the 1800s and early 1900s. These railway corridors are lined with industrial buildings that were built more than 70 years ago. As the area became less dependent on the railroad, the surrounding industry and economy declined, leaving these large, durable structures vacant.

Some of the tracks have been converted to light rail, providing easy access and prompting conversion opportunities. Sacramento is currently studying the conversion of vacant space within this corridor into lofts, restaurants, and retail space.

The Union Pacific Railyard, adjacent to downtown Sacramento, is the subject of another conversion plan now in its early stages that would result in 9.6 million sf of office space, 500,000 sf of retail space, 640 hotel rooms, and 2,000 residential units.

The whole district of northern Sacramento also was in decline as the rail community experienced economic decay. Recently, it has experienced a revitalization as the city's “art district,” with millions of dollars of public funding supporting promotional activities and incentive subsidies to encourage businesses to repopulate the area.

Opportunities Abound
Once a blight on the landscape, vacant or dilapidated industrial buildings now offer opportunities for innovative developers. Whether it's upgrading facilities or converting them into a different use, commercial real estate professionals can take advantage of this national trend.

Justin Stein

Justin Stein is the regional research manager for Grubb & Ellis New York. Contact him at (212) 326-4815 or justin.stein@grubb-ellis.com.

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