Adaptive Reuse: How to Profit from Preserving Historic Properties
Written for leverage.com
What Is Adaptive Reuse of Historic Buildings?
Adaptive reuse is the practice of repurposing an existing structure for new uses other than the one it was originally intended for. The practice is best known as a way to reinvent historic buildings and preserve original architecture.
For example, historic Faneuil Hall in Boston began as a public market in the 1700s and a stage for activists and politicians from Oliver Wendall Holmes and Susan B. Anthony to Bill Clinton. After falling into disrepair in the 1970s, Mayor Kevin White, along with architects and local business leaders, worked to renovate and reuse the dilapidated old buildings into a bustling marketplace and tourist attraction.
Adaptive Reuse Is Not Limited to Historic Buildings
Adaptive reuse extends to a variety of older buildings whose original uses are no longer sustainable. Shopping mall real estate is an example.
“There are a lot of retail conversions as a result of COVID,” said Rainey Shane, Vice President and Associate National Director of JLL’s Project and Development Services group in the Southeast Central region. The pandemic sped up the transformation that began with the rise of online shopping. Malls, Shane added, “were built for the way Baby Boomers shopped,” not for a world of one-click purchases. Developers and architects are turning some of them into a variety of uses, including restaurant ghost kitchens, offices and last mile distribution centers, the last stop between the warehouse and the customers’ doorstep.
Other retail spaces have become medical facilities. As healthcare real estate firm HBRE wrote, this conversion is profitable because “landlords benefit from the e-commerce-resistant nature of a medical tenant. Additionally, since medical tenants are known to hold onto longer leases, the initial buildout or cost of necessary upgrades are well worth the investment.”
Across the country, many hotels have become affordable housing, because the COVID pandemic decreased tourist demand.
Why Is Adaptive Reuse Important?
Instead of demolition, reuse of historic structures provides a new lease on an asset’s life, by, Masterclass wrote, “converting them into something useful for the surrounding, like low-income housing, student housing, community centers, or mixed-use creative venues.”
Even formerly successful properties might have to come to terms with not living up to their economic potential. As Todd Caruso, Senior Managing Director at CBRE told Leverage, adaptive reuse allows developers and investors to fulfill “the highest and best use of the land, which creates a higher return on investment and enhances the value of the entire parcel and makes profits higher.”
It’s also a great marketing story for the surrounding area.
“If an emergent industry in a location can take a structure and reuse it for good, the story around that opportunity is powerful and symbolic,” Richard Jantz, Executive Managing Director at Cushman & Wakefield, told Leverage.com via email.
Advantages of Adaptive Reuse Architecture
Besides historic preservation, adaptive reuse can preserve profits and environmental sustainability.
Preserving Architecture That Wouldn’t Be Built Today
In Nashville, Lochlin Caffey, Associate Director, Project and Development Services at JLLy pointed out that many admirable architectural details, like cast iron facades, stone arches and other historic features, simply wouldn’t be cost-effective to make on a large scale in 2021.
Caffey said, “we are seeing a lot of conversions of factory space… ones that are preserved have become destination retail and office, [sometimes] small multifamily.”
Adaptive reuse means keeping the elements we love without the cost of doing so on new construction.
Promote Sustainability
40% of greenhouse gases come from the built environment. That’s a lot of energy that doesn’t need to be wasted, when we have existing, underutilized buildings. Choosing adaptive re-use over demolition followed by new construction means cutting down on additional buildings that might add to those emissions, while also conserving water and energy.
“All of the energy expended to make concrete, steel, brick, is basically recaptured by not tearing [buildings] down,” Caffey said.
Lower Construction Costs
“Adaptive reuse,” according to Masterclass, “uses more labor than it does building materials, and while material costs have skyrocketed in the last few decades, labor costs have increased only slightly.”
Caffey and Shane concurred, adding, “What COVID has demonstrated is that developers are not willing to take a bigger risk on a property.” If done properly, they add, architecture reuse projects “are 60-70% of the cost of doing a brand new development.”
Of course, construction costs will depend on the integrity of the existing structure. Always perform your due diligence pre-construction so you don’t end up with high project costs and a virtually new building, anyway.
Tax Breaks for Historic Preservation and Environmental Remediation
If your adaptive reuse project involves historic buildings, you may be able to take advantage of a federal tax incentive program called the historic rehabilitation tax credit. This program is a credit that directly reduces taxes instead of giving a tax deduction that reduces taxable income, potentially resulting in bigger savings. It’s worth investigating if there are similar tax credit programs in your state.
If your adaptive reuse project also involves environmental remediation such as cleaning up asbestos or other harmful chemicals, you may also be eligible for brownfield redevelopment tax credits, either on a federal, local or state level.
7 Factors CRE Investors and Developers Should Consider
It may be easy to fall in love with the architectural details of a historic building, or the new possibility for profits by renovating a newer one, but there are a number of questions you and your team should ask yourselves before you get started.
1. What is your projected budget and ROI?
Whether you’re buying a new project for adaptive reuse or renovating one you already own, consider both the acquisition costs (use our acquisition calculator) and the redevelopment costs. This might be affected by your development timeline.
“Most of these properties will be sold cheaply as distressed and could even be provided fast track approvals if the property is blighted,” said Jantz.
But that potential savings doesn’t mean you should skip the budget analysis. If the projected profits can’t make up for the costs of renovation, the project may not be a good fit.
He added, “All real estate revolves around ROI, so the key component is building a pro forma around rent and receipts that would turn a profit for the development partners.”
2. Can the building physically handle the changes you’re planning for it?
Are the beams not quite holding up the ceiling? Can the plumbing in an old factory where people worked handle the needs of a place where people will live? If not, how expensive is it to retrofit the building to handle those needs? To answer these questions, hire a professional, like an engineer, to study the physical space and figure out what’s realistic. As Shane and Caffey said, it’s important to do this predevelopment work on the front end to prevent problems later on.
3. Have you surveyed the surrounding community residents, local government officials and other stakeholders?
“The most critical point in undertaking an adaptive reuse project is to ensure that the new use will be supported by the community,” Jantz explained.
Many municipalities offer benefits to developers for an adaptive reuse in the form of tax breaks (in exchange for a community use) or other benefits, because these projects should raise the tax base and property values. To obtain these benefits however, you have to win the community’s support.
4. What are the environmental conditions of the building and the surrounding property?
Caffey and Shane emphasized the importance of a variety of environmental tests, not just on the building itself, but on the grounds and soil around it. Especially for legacy industrial properties, it’s critical to take a really thorough look.
“A lot of industrial sites have bad things in the soil in addition to what’s in the building,” Caffey said. “A lot of stuff in the soil can be an unpleasant surprise.”
5. Is your new use the right use for the existing market?
Match your use with the market. Just because turning two spaces in a shopping mall into a medical facility and another one into a co-working space worked in the town next door doesn’t mean it’s the right choice for your project.
Caruso and Hunter were adamant: Invest time and energy in marketing and feasibility studies before you invest in construction, and partner with potential new tenants. For CBRE clients, this investigation includes their proprietary analytics tools, including location intelligence which leverages multiple digital technologies to animate the site selection process and determine which uses are the best ones for each location.
6. Do you have the right zoning permits?
Even if you’ve already determined that the new use is right for market demand, you have to make sure you either have the right zoning permits already or have enough time, energy and money to invest in getting them. Zoning permits determine what uses are allowed in the building and its lot, and you can’t build without confirming that the uses are in line with zoning laws — unless you get an exemption.
7. Have you coordinated with all of the key players, and legal protection?
The property you’ve invested in (or are hoping to invest in), might have multiple owners on the same lot.
As Caruso explained, the person who owns the parking lot might be different from the person who owns the department stores, or even the smaller retail spaces. They all might have different agreements over how to use the space. When you look at a mall, people think it’s one operator, but maybe it’s four or five.
This complication doesn’t mean your plans can’t move forward, only that you need to make sure you get familiar with previous agreements to ensure you’re not violating them.
3 Examples of Adaptive Reuse
Here are some creative adaptive reuse projects from all over the world. Follow the latest adaptive reuse trends here.
Pratt Pullman District — Atlanta, Georgia
Built in the early 1990s as the Pratt Pullman Yards in Atlanta’s Kirkwood neighborhood, this site was once a manufacturing and repair facility for rail cars. Developers converted them to mixed-use office, retail and entertainment facilities. Apartments are not far behind.
Allez UP Rock Climbing Gym — Montreal, Canada
The former Redpath Sugar Refinery is now a rock climbing gym. The architects transformed the main building and additional silos to create rock walls, inspired by the texture and color of the sugar that was formerly processed on site.
Jaegersborg Water Tower — Copenhagen, Denmark
This former water tower in Denmark’s capital city is now home to a variety of uses. On the top floors, some lucky students get to live with panoramic views of Copenhagen, and the lower floors are home to a youth center, with multipurpose community rooms. There is also a playground outside.
Profits Are Likely, But Don’t Forget Due Diligence
With the right spaces, adaptive reuse is as good for preservation and sustainability as it is for your bottom line. Just make sure you’ve done your homework to ensure you’re getting the best return on investment.