Reusing the Old
Innovative cities are making adaptive reuse competitive with new construction.
Though 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.
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 structures, 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 unoccupied 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.
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. Communities 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.
In December 2016, Tucson, Ariz., Mayor Jonathan Rothschild and the Tucson City Council voted to implement a 24-month pilot program to encourage adaptive reuse, modeled after similar programs used in Phoenix and Los Angeles. The program incentivizes developers and business owners to repurpose existing buildings within the city limits while maintaining and enhancing the current structure.
AdRu projects typically involve controversial and costly ordinance variances for items related to density, parking, and compliance with any number of modern building codes unrelated to life-safety. Communities like Tucson are addressing zoning codes and other unique AdRu challenges to accelerate the reutilization of empty buildings.
The Tucson program primarily focuses on buildings that are 50 years old or older or that have been vacant for 30 years or more, but it also makes allowances for buildings that are at least 30 years old. Projects also are required to provide community benefits and ensure consistency with the plans of the surrounding area and neighborhoods. The incentives for developers and investors include relaxed parking, permit fee waivers, and flexible density and zoning requirements.
“This program will make it easier to get new businesses into old buildings … [It] will save developers time and money while boosting the economy through job creation and a proliferation of construction projects,” says Jonathan Mabry, Tucson's historic preservation officer. “Historic preservation is achieved by giving new lives to our vintage and historic buildings, and sustainability is created by recycling entire buildings.”
Tucson is a model for other cities looking to pave the way for more AdRu activity to stimulate the local economy and put empty buildings back to productive use. But until we see widespread collaboration from local governments, law and ordinance challenges will prevent AdRu from making a positive impact in many markets.
Editor's note: This article is an excerpt from the 3Q18 Commercial Real Estate Insights report from CCIM Institute and the Alabama Center for Real Estate. To read the full report, visit www.ccim.com/insights.