It’s no secret that the office and retail sectors have faltered during the COVID-19 pandemic. But something positive has come out of something negative: adaptive reuse is on the rise.
Adaptive reuse is the process of converting an underutilized property type into a new property type to meet higher demand in that sector.
Currently, real estate sponsors are focusing more on converting assets such as office and retail properties into multifamily and industrial buildings. This comes amid trends of increased remote working and the rise of e-commerce during the pandemic, while there was an ongoing shortage of multifamily housing and a spike in demand for industrial space. In tandem with these trends, adaptive reuse is being fueled by the desire to turn aging, underused assets into desirable spaces.
A particularly interesting approach to adaptive reuse is happening in the state of New York, in which a governor-appointed, 15-member panel was tasked with examining ways to redevelop shuttered prisons.
“Adaptive reuse is a critical component of economic development, requiring a strategic plan and partnerships between the public, private, academic and nonprofit sectors,” Ryan Silva, executive director of the New York State Economic Development Council, said in commenting about the prison-redevelopment plan.
Whether it’s an underused office space, a neglected retail space, a closed hotel or even a shuttered prison, adaptive reuse has the potential to implement innovative solutions that benefit tenants, sponsors, investors, and the community as a whole.
The Boom in Conversions to Multifamily Units
Nowhere is the rise of adaptive reuse more prevalent than in the multifamily sector.
Last year, more than 20,000 converted apartment units hit the market, according to a Yardi Matrix estimate. That’s the highest yearly total ever. In 2022, nearly 53,000 converted apartments are expected to come online.
A large share of these multifamily projects once were office buildings. Due to the increase and popularity of remote working caused by the pandemic, more companies require less office space than before.
“Adding more empty office buildings to the list of potential adaptive reuse projects will likely strengthen the force of this trend,” according to the American Planning Association.
Aside from reducing costs, adaptive reuse projects that create new apartments fill a huge void for housing. To meet increasing demand, the U.S. needs to build an average of 328,000 new apartments every year by 2030, according to the National Multifamily Housing Council. In addition to helping house more people, sponsors that embrace adaptive reuse can add to the apartment supply in a more cost-effective manner than ground-up development, especially in an environment where office and retail properties may be trading at a discount.
Hotels Can Be an Easy Target for Multifamily Conversions
While office space grabs the spotlight in terms of apartment conversions, hotels are also being transformed into living space. Yardi Matrix says that among buildings slated for redevelopment in 2020 and 2021, hotels accounted for 30% of the projects.
Hotels are already divided into individual living spaces with private bathrooms, and in some cases, small kitchenettes, making the conversion to multifamily relatively easy. For sponsors, that relative ease translates into lower costs than transforming, say, an office building into an apartment building.
Shopping for Mall Space
In addition to office buildings and hotels, malls and other retail spaces are being repurposed. Retail vacancies, spurred in large part by the demise of department stores and the rise of e-commerce, are prompting sponsors to transform space within malls to medical, education and industrial tenants.
Malls are especially attractive targets for adaptive reuse thanks to their typically prime locations.
A 2021 report from commercial real estate brokerage Newmark makes the case for converting vacant stores at malls and other retail spaces into warehouses that accommodates the surge in e-commerce.
“Converting vacant anchor spaces at shopping malls into distribution or fulfillment centers in service of e-commerce offers considerable upside as a redevelopment play,” the report says. “In some cases, a full property conversion may be the highest and best use of the property…”
The Future of Adaptive Reuse
In 2018, the CCIM Institute and the University of Alabama’s Culverhouse College of Business published a report identifying more than 33 million square feet of adaptive reuse projects valued at roughly $4.4 billion that had recently been finished or were underway. The report envisioned the number of adaptive reuse projects could double by 2023.
Due to changes brought about by the pandemic, K.C. Conway, chief economist at the CCIM Institute, believes the volume of adaptive reuse projects could double or triple compared with the 2018 forecast. In other words, adaptive reuse is on the rise and appears to be here for the long run.