Adaptive reuse revival transforms neglected properties into productive assets.
it the “Friends” effect: After a decade of watching the television show about
six characters sharing funky urban digs, young adults in mid-size U.S. cities
have decided that’s the life they want. But unlike previous generations who
actually took off for the big city, today’s young adults often can find loft
apartments with exposed brick walls right in their own hometowns.
one degree or another, it’s happening in St. Louis, Kansas City, Mo.,
Albuquerque, N.M., Louisville, Ky., Columbus, Ohio, and Cleveland, among other
secondary and tertiary cities. While earlier urban revitalization attempts
focused on convention centers and sports stadiums, today’s city planners
realize that attracting residents is crucial to attaining a 24/7 downtown.
just one of the many factors creating adaptive reuse opportunities for
commercial real estate professionals in markets of all sizes. And today’s
investment real estate market provides further incentive. The convergence of
low interest rates, plentiful capital, a ready supply of conversion product,
and sky-high prices for new buildings has created an unprecedented opportunity
for investors to buy low, add value, and build equity. Those who don’t relish
the developer role can find opportunities in consulting and locating adaptive
reuse properties for clients.
Time Is Right
years of fits and starts, adaptive reuse has come into its own as niche
product, mostly as part of a larger urban redevelopment trend. For example, in
St. Louis 20 properties have been rehabbed into rental and for-sale units and
31 more are in the process. By year-end 2006, conversions will account for more
than 2,100 additional units of downtown housing, according to the Downtown St.
Louis 2004 Housing Report. Occupancy rates last year averaged around 80
percent, with newer projects averaging 94 percent.
outcome is a plus on several fronts. Urban residents earn higher than average
area salaries — in Kansas City, $55,800 versus $35,000 — and spend 67 percent
more in restaurants and about 50 percent more on cultural activities, according
to Claritas research. What attracts them is what they can’t get in the suburbs:
the character of older architecture and the “walkable” city experience.
create the “experience” in secondary markets, city planners are focusing
development in particular neighborhoods, encouraging reuse through tax credits,
city streetscape and transit improvements, and economic development business
a result, developers are turning once-vacant buildings into investment
properties, tapping into tax credits for equity and financing. In some cases
they are taking class B and C office properties off the market, reducing some
of those double-digit central business district office vacancy rates. Retail is
chasing after new urban rooftops, providing services, restaurants, and night
life. In cities where critical residential mass is met, mixed-use developments
are on the planning boards, combining adaptive reuse and new construction,
bringing hotels, national retailers, and entertainment venues.
smaller markets, other cultural trends are promoting adaptive reuse. The National
Trust for Historic Preservation’s successful Main Street program counts more
than 96,000 rehabbed properties in communities of all sizes. Along with raising
the profile of adaptive reuse, the Main Street program focuses on creating a
self-sustaining mix of housing, retail, entertainment, and businesses.
the same lines is the Preserve America program, which has designated 220 towns
as Preserve America communities, allowing them to tap into federal money for
local historic and cultural site preservation, including adaptive reuse. As
part of the cultural tourism trend, these towns focus on attracting visitors
who plan vacations around historical and cultural offerings and spend almost
$200 more than the average U.S. traveler, according to the National Travel
redevelopment of under-used properties into multifamily, retail, and office
space is occurring in first-tier, secondary, and tertiary markets nationwide.
While these projects provide new opportunities for commercial real estate
professionals, they largely depend on local market factors and a broker’s
the late 1990s, Todd D. Clarke, CCIM, president of NM Apartments/Cantera
Consultants and Advisors in Albuquerque, N.M., was in on the ground floor of the
city’s dramatic downtown turnaround. As the real estate consultant on one of
the two final teams battling for the right to redevelop Albuquerque’s old high
school, his market study determined “that apartments were the highest and best
two teams presented the city with different approaches. “The other team
proposed a mix of uses that made all of the constituents happy: performing
arts, retail, YMCA, nonprofit office space, some low-income housing,” Clarke
says. “But using CCIM methodologies, we knew we needed to get the highest
possible net rents, which at that time were coming only from apartments. The
other team offered to buy the building, but the city had to guarantee $30
per-square-foot triple-net rents over 30 years, which had a net present value
of $36 million. Our plan asked for the buildings free, $4 million in cash, and
a parking structure: total NPV of $11 million.”
the project’s approval, Clarke conducted additional studies for the developer,
architect, lender, and tax credit investors. The project received strong local
and national attention for its preservation of the school campus — a
local landmark — as well as exterior building features such as entryways,
windows, and architectural details. In the first phase, on the interior, the
developers framed 69 rental lofts from classrooms preserving original maple
floors, oak doors, and slate blackboards. Even old hallway lockers were
replaced with new ones to provide tenant storage.
$33 million project included the conversion of four historic buildings to
rental and for-sale lofts and office space. The campus revitalization opened up
Albuquerque’s new East Downtown neighborhood to redevelopment and includes four
new-construction loft projects, as well as restaurants and other retail. For
Clarke, the project led to other consulting assignments such as a comprehensive
housing study for the Federal National Mortgage Association — and a bit of
fame. “When I mention the project, people instantly recognize it, and it’s a
great project to have in my deal résumé.”
To retain the building's character, the Albuquerque, N.M., high
school's original windows were removed and shipped to Chicago for
reglazing and restoration.
photos: Paul Kohlman
by Your Gut
market analysis sold the city of Albuquerque on the loft conversion project,
that type of in-depth study isn’t always feasible. “Market studies in a town
the size of Corvallis are almost meaningless, since comparables would come from
markets four to 10 times bigger,” says Gary Feuerstein, a principal of Endex
Engineering in Corvallis, Ore. With a partner, Feuerstein has redeveloped
several properties in this town of 50,000, most notably an 1887 National
Register of Historic Places railroad depot into corporate apartments and
meeting space. “An outsidernever would have developed the depot in the same
way, simply because they could not understand such an opportunity through
available market data,” Feuerstein says.
market knowledge is intuitive. “There just is no substitute for living in the
same place for 40 years to anticipate what the market might support,” he says.
“We understood that Corvallis has a good deal [of demand] for this kind of
project. Oregon State University, Hewlett-Packard, CH2MHill Engineers, and
several software companies generate considerable above-average traffic.”
Feuerstein’s gut notions led him to match the property to the market need,
sometimes the process is reversed: The demand leads to the property search.
Andy Bergfeld, CCIM, owner of Bergfeld Commercial Realty in Tyler, Texas, found
a niche to fill by analyzing a local office survey in his town of 100,000.
percent was the average occupancy rate for downtown class A offices,” he says.
“But when you looked at buildings that had parking, the occupancy rate jumped
to 98 percent. If I could offer class A office space with parking, I could
lease it easily.”
other projects, it all goes back to location and the deal’s details. Richard D.
Whitney, CCIM, SIOR, principal of Whitney Commercial Real Estate in Asheville,
N.C., helped two clients find and renovate an old textile mill into office
space. “The industrial market of western North Carolina was hit particularly
hard by the recession and the effects of NAFTA,” he says. “We wound up with
millions of square feet of vacant industrial product.”
the particular property that Whitney identified was a “30,000-sf abandoned loom
facility — a brick building built like a bomb shelter — on about five acres on
the periphery of the Biltmore Village historical shopping district.” Along with
its good location, the property’s reuse is freeing up more than an acre of land
that “has been carved out debt free and is being marketed as a land lease or
for Good Bones
the right properties for adaptive reuse is half the battle, Bergfeld says. The
property he finally bought with two partners is on Tyler’s Main Street, about a
block south of downtown. He drove by the building numerous times without
considering it because he assumed the empty lot next to it belonged to an
adjacent building. In addition, the building was “really ugly,” he says.
town’s main furniture store in the 1930s, the 2.5-story building had been
covered with wide aluminum siding and “no money had gone into the store for a
long time,” he says. Since the store was made up of showrooms, the big open
spaces held few structural surprises and made the interior renovation easier.
“It’s a well-built building that I knew I could do something with,” he says.
agrees that a solid structure is critical. Of his dozen or so adaptive reuse
projects in Corvallis, most have converted industrial to office, multifamily,
or retail. “We like properties that are not understood by the mainstream, but
with good bones and turnaround potential,” he says. He and his partner purchase
and manage their properties, relying on their engineering skills. “Since we
have the capabilities to design the space, we can offer preliminary planning
for the space at very little cost to tenants. This is a better way to keep
tenant options open until a lease is in place,” he says.
the rapid pace of adaptive reuse projects in some markets makes the process
look easy, it often requires patience and creative thinking. “The biggest
stumbling block is the unknowns,” says Whitney, whose clients faced petroleum
contamination and asbestos in the Asheville textile mill renovation. “We also
determined that the floor elevation changed two feet in the 300-foot length of
the building. One of our challenges was dealing with the Federal Emergency
Management Agency, because our floor is eight inches below the flood plain.
There are restrictions on how much money we can put into the building without
having to take extraordinary measures to comply with current FEMA regulations.”
caption: The brick refacing of this former 1930s furniture store facade
and details such as a wrought-iron balcony added value and increased
the building's leasing potential.
photos: Bergfeld Commercial Realty
a climate where new product prices are out of reach for some investors,
adaptive reuse can provide good returns for those willing to take the risk.
Whitney’s clients bought their building for about $28.85 psf and put in $25 psf
in improvements. “If they sell the project fully leased at a 10 percent
capitalization rate, their $1.6 million investment will be worth $3.3 million,”
renovation of Feuerstein’s railway depot “cost about 80 percent of the cost of
new construction and could not be matched in character,” he says. Although no
adaptive reuse project is typical, shell rehabilitation can cost $10 psf to $50
psf and tenant buildout can run $30 psf to $80 psf, he says. “Most tenants can
take advantage of the old commercial or industrial finishes,” he says, saving
significantly on interior finish costs.
renovations, even up to class A space, still are less costly than new
construction and we pass savings on to our tenants,” Feuerstein says.
occupancy rate overall has been above 90 percent for the past few years,
including the apartment portion.”
good tenants increase the buildings’ value, Feuerstein adds. “It’s not uncommon
to see building values go from $40 psf to $100 psf when a good tenant moves in.
We see the most significant value increases two to three years later when the
appraisals acknowledge that the buildings have become viable, stable commercial
projects. Escalation of 15 percent per year for a few years is not uncommon.”
turning his furniture store into offices, Bergfeld added value through
substantial cosmetic changes. He ripped out the half-story mezzanine and gave
the first-floor spaces 15-foot ceilings. The second floor has a street-side
balcony and a domed roof where ceiling heights range from 10 feet to 17 feet.
He also retained the interior’s oak floors and pine beams. Outside he refaced
the façade in brick, with detailing to make the building look historic. “I
wanted to retain the charm of an 1880s building in a southern town,” he says.
The main-floor entrances are French doors topped by arches, and the upstairs
balcony is detailed wrought iron.
past experience as an office-leasing specialist helped him design the space to
attract local tenants. The two floors are divided by central hallways with
about 3,400 sf on either side. He kept the common areas small, installed period
reproduction fixtures, and can drop in walls or leave the space open. He has
leased out half of the second floor to a law firm and is negotiating with a
tenant interested in the entire first floor.
building redevelopers, adaptive reuse is a bit of a passion — but a practical
one. Feuerstein now is developing two more corporate apartm
ents in another
historic structure: an 1892 classroom building that was moved from the Oregon
State campus to land adjacent to the depot. “We think the next two apartments
will expand our ability to accommodate late arrivals, maybe even boost the
overall occupancy rate.”
“Adaptive reuse is something I enjoy,” Bergfeld
says. “I bought [the furniture store] at an 8.5 percent cap rate and I created
a building that couldn’t be built for what the rehab cost. Cap rates are so
much lower now than when I started in real estate. You have to get creative and
build value into the building. The rehab represents a greater risk, but the
return will be higher.”
caption: Corvallis, Ore.'s 5,000-sf 1887 train depot was converted into
well-appointed corporate apartments that appeal to professionals on
temporary work assignments in the area.
photo: Endex Engineering