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Adaptive Reuse: The ‘Wrong’ Project in the Right Market

Adaptive reuse is not a new concept in commercial real estate. However, the convergence of the COVID-19 pandemic, technological advancements, and calls to embrace environmental, social and governance (ESG) standards has helped accelerate this concept.

With rising industrial and housing demand leading the way, the “everything old is new again” mindset has helped to repurpose many now-obsolete assets, saving time, money, and resources. According to industry data, adaptive reuse projects cost 16 percent less than ground-up construction and reduce construction timelines by 18 percent. These transactions also often qualify for tax benefits and alternative financing sources.

As structures evolve to meet the changing needs of its users, so should the commercial real estate industry. Sustainable redevelopment practices, such as adaptive reuse, can significantly help to lower energy consumption and reduce the more than 600 million tons of construction and demolition debris produced in the United States each year.

Another advantage to adaptive reuse development may be a streamlined approval process versus securing new construction permits. If the project does not require additional parking or disturbs land elements, for example, you could save several months on the approvals process.

And while Deloitte estimates that up to 90 percent of future development will focus on renovation of existing buildings, you may be asking, what’s the secret to a successful adaptive reuse project?

The answer is to find the “wrong” project in the right market.

First and foremost, the market needs to be considered. The old real estate adage of location, location, location applies in this sector more than ever. While many lenders tend to disregard entire swaths of asset classes such as office or retail now, preferring to chase the popular multifamily, it’s important to look beyond the obvious and current use and see the possibilities.

Big-box retail chains, for example, have had to assess what to do with their large, now underutilized, storefronts as many of these properties are located at prime, “main and main” locations, they are intrinsically attractive possibilities for mixed-use project.

So what’s the right market, location-wise? At the moment, some of the stronger commercial real estate markets include Austin, Raleigh/Durham, Nashville, Charlotte, Dallas/Fort Worth, Orlando, Atlanta and Tampa/St. Petersburg.

While these cities are currently leading the markets in terms of population growth and net migration, don’t rule out larger metros, such as New York, Los Angeles and Boston, which may be experiencing slower population growth but will continue to be highly sought-after as we move past pandemic-related restrictions.