Adaptive reuse of commercial real estate

September 27, 2017

A blog post by Saurabh Mahajan, Real Estate manager, Deloitte Support Services India Pvt. Ltd.

In the future, we could see increased vacancies across property types as existing buildings outlive their utility due to changing occupant preferences, higher costs, and availability of other, better options such as the state-of-the-art and environmentally friendly buildings.

Given this scenario, adaptive reuse could effectively be a key factor in the future real estate ecosystem. Indeed, estimates suggest that new development in the next decade will likely be minimal and 90 percent of the development will likely be focused on renovation and adaptive reuse of existing buildings.

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What is adaptive reuse and why should CRE companies care about it?

In an adaptive reuse, you take an existing building and repurpose it for a different use, while maintaining the original structure, but doing the necessary retrofits. There are multiple benefits that can accrue to the entire real estate ecosystem, be it to the CRE owners, developers, investors, or society as a whole.

In terms of economic benefits, studies suggest that compared with a new construction, adaptive reuse and restoration can be 16 percent cheaper in terms of construction costs and take 18 percent less execution time.² Also, if repurposing is done with smart and sustainable features in mind, it can help improve building performance and valuation.

Socially, reuse of vacant structures could also give a new lease on life to the neighborhood while supporting the local economy, and enable people to stay close to their workplaces—all the while helping preserve the social and cultural heritage of a region.

When it comes to adaptive reuse opportunities, CRE companies have several options. Some of them could include repurposing vacant properties into diverse property types, including mixed-use. While others options could be to leverage vacant spaces for a newer form of tenants and businesses.

Many of the old suburban malls were built in the latter half of the past century and cover several acres. We have seen some good examples of malls being repurposed into mixed-use developments that include apartments, collaborative office spaces, retail and entertainment spaces, and some civic amenities.

For instance, the Highland Mall in Austin, TX, and Cinderella City Mall in Englewood, CO, are prime examples of such innovative reuse that have not only successfully fulfilled a community need, but also helped to boost the local economy.³ In addition to mixed-use conversions, we have seen malls being repurposed for diverse uses. For instance, a mall in Jackson, MS, was repurposed into a medical complex while other malls have been converted into churches and public spaces.⁴

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Innovations in adaptive reuse

Further, CRE companies can also consider other innovative avenues to reuse vacant spaces by leasing out to unconventional tenants and business types. The use of old warehouses and distribution centers outside city limits for indoor agriculture and aquaculture is a good case in point.

New Jersey-based AeroFarms reuses open spaces provided by industrial properties for vertical farming of vegetables.⁵ The company has the advantage of being close to its customers, which helps AeroFarms to save big on logistics costs.⁶ Another major advantage is, to produce the same amount of vegetables, AeroFarms uses less than 1 percent of the land that traditional farms use.⁷

In a nutshell, adaptive reuse provides a lot of opportunities to refurbish vacant or abandoned real estate assets. However, owners, investors, and developers need to consider the economic, legal, and social factors which could challenge their reuse decisions.

For instance, they will need to figure out the reusability of spaces based on current demographic trends and building structures. They will also need to collaborate with local planners and administrations to comply with relevant building codes and leverage any favorable zoning regulations and tax incentives. In fact, many local governments in California provide incentives for adaptive reuse through increased flexibility in zoning requirements and building codes related to construction, height, parking, and setbacks, and tax breaks.⁸

Finally, owners need to ensure that the local community is in sync with the proposed reuse and its potential benefits to avoid any opposition and subsequent project delays.

As such, adaptive reuse could be a win-win for all stakeholders, and the time to act is now. Have you thought about the adaptive reuse of your old and vacant properties? What examples could you share with our readers on this blog?

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