There is no doubt that COVID-19 has impacted some real estate sectors more than others. While the word is still out on how much demand for office space will exist after the pandemic, it is becoming clear who the market sector losers and winners are. The retail and hospitality sectors have taken the biggest hits, while the biggest winners are industrial and life science. What happens to real estate assets when lack of demand makes them obsolete? Thanks to creative and smart investor groups, we are seeing a wide variety of adaptive reuse projects, which are taking underperforming assets and converting them into high demand uses.
Why would real estate investors look to adaptive reuse versus building from the ground up? According to Investor Management Services, repurposing existing buildings can be 16% less expensive than new construction and take 18% less time to complete.1 Adaptive reuse is not for the unsavvy investor. Changing the use of a property could have restrictive zoning requirements and other physical and market limitations. These projects are currently sweeping the marketplace, but there are some potential pitfalls if not executed properly.
E-commerce has taken the place of many purchases that would have typically been purchased at a retail storefront. According to Business Insider, 8,300 stores in the U.S. closed in 2020. Retailers like Stein Mart, JCPenney, Nordstrom and Sears are still planning to close stores.2 Fortunately, innovative investors are converting these obsolete spaces.
Chris Weilminster, EVP and CEO of Urban Edge Properties, said the REIT transformed a former retail site in New Jersey into a grocery distribution center.3 The center not only services smaller stores, but also dedicates a portion of the space to the public to shop at wholesale prices.
Investors are also looking at converting big box retail and defunct malls into warehouse distribution centers. The Euclid Square and Randall Park malls in Ohio have been converted into fulfillment facilities by Seefried Industrial Properties. 4 Pressure on the logistics sector to keep pace with the e-commerce boom is a driver behind these conversions.
Abandoned shopping malls in Ohio have received a facelift. Euclid Square Mall (left) and Randall Park Mall have both been converted into fulfillment facilities by Seefried Industrial Properties.
One of the more recent market sectors that are looking at retail properties are life science landlords. According to Cushman & Wakefield, with a growing and aging global population, capital investment and scientific advancement are at a historic high and greater demand for lab and office space has resulted in a 12 million sq. ft. new construction pipeline in key markets.5
While it’s easy to find examples of investors converting retail and office space into multi-family, industrial and commercial uses, it’s not that easy to find examples of buildings that have successfully been converted into life science spaces, due to special requirements. According to Life Science Leader, “Labs carry special requirements not common in other development types—including greater ceiling heights, unique lab equipment, more robust HVAC systems, and structural considerations. While the prospect of redeveloping an existing building in a life science sub-market—such as an industrial warehouse or manufacturing facility—is achievable, the challenges associated with fitting out these buildings for the specific requirements of lab work can be complex and costly and require thorough due diligence.”6
Complex requirements don’t mean it can’t be done. ABI-LAB, a new life science incubation site outside of Boston, is located in a converted office space.7
There are also life science landlords that are making a play for life science conversions. San Diego’s Phase 3 Properties just acquired a 185k SF Class A office building that they intend to convert to life science. This property will be the first life science property located in downtown San Diego. Also wanting to play in the life science market in downtown San Diego is Stockdale Partners, acquiring a “past its prime” shopping mall for $330 million (USD) and initially envisioning a tech client occupying the space. Stockdale is bolstering its case to become a life science campus.
ABI-LAB, a life science lab in Natick, Massachusetts, is located in a converted office space. Map Data: ©2021 Google
Hospitality assets have also been the target of repurposing. An underperforming extended stay hotel near The State University of New York is in the process of being converted into a Class A, 275-unit student housing developent.3 Kairos Investment Management (KIMC) is also looking to convert hospitality properties into apartments. The firm is on their third deal to transition hospitality into apartments, with two successful conversions in Albuquerque and Austin.8
Billy Meyer, SVP of real estate lending at Columbia Pacific Advisors, believes there is potential to inject unsubsidized affordable housing into the marketplace by converting old hotels.8 The City of San Diego and San Diego Housing Commission is utilizing $37.7 million in state funds to purchase two Residence Inn properties. These two properties will create 332 permanent supportive housing units.9
Economic challenges will continue while we push our way through the pandemic. As we continue to monitor any long-term impacts on the various market sectors, specifically office, retail and hospitality, we will continue to see innovative developers and investors adapting and reusing existing assets successfully.
Investor Management Services – CRE Adaptive Reuse in Action: From Retail Storefronts to Distribution Centers
Business Insider – Stores Closing in 2020 List
Marks Paneth Accountants & Advisors – Adaptive Reuse is the Future of Commercial Real Estate
GlobeSt – Big Box Retail Eyed as Good Candidate for Warehouse Conversions
Cushman & Wakefield – Life Sciences 2020: The Future is Here
Life Science Leader – Developing Life Sciences At The Speed Of Innovation
Bloomberg CityLab – Here Comes the Life Sciences Land Rush
GlobeSt – More Firms Explore Hospitality-to-Multifamily Conversions
San Diego Housing Commission – San Diego Announces Proposed Purchase of Two Hotels to Provide Over 330 Units for San Diegans Experiencing Homelessness
Crista Swan is a Senior Project Manager for Project Management Advisors, Inc. (PMA), a national real estate advisory firm that provides consulting services as the owner's representative, specializing in development management, project management, investor management and program management services to commercial, institutional, residential, educational, municipal and private sector clients. While at PMA, Crista has managed over 561K SF re-positioning, common area, and tenant improvements and worked with teams on multiple ground up developments totaling over 1.6M SF.
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