Shane Peter
Published on:
May 9, 2023
min. read

Adaptive Reuse Commercial Real Estate Trends in 2023

While adaptive reuse is most frequently considered in the context of repositioning an architecturally significant historic building for a new use, one can safely widen the definition to include adapting all vacant, unused, underused, foreclosed and abandoned buildings to new, sustainable and better utilization. In 2017 Saurabh Mahajan of Deloitte expected adaptive reuse to become ever more common while new development in the 2020s would decline. Mahajan’s prediction, made five short years ago, was that 90% of development in the 2020s would focus on renovation and adaptive reuse of existing buildings.

Risks When Adapting an Old Building to a New Use

While typical construction costs for reuse projects may average out as slightly less expensive than similar new-build projects, reuse projects can be significantly expensive as well. Foundations, superstructure and MEP systems usually require significant work or replacement, and costs can be more expensive for labor. Actual construction logistics can be more challenging, and custom materials may be required. For example, windows may not be standard sizes. There’s the issue of bringing the building up to code, and the possibility of having to deal with potentially hazardous materials.

Solutions, Challenges and Costs When Remodeling an Older Building for Adaptive Reuse

Oliver Fox of MGAC advised, “Be prepared and have an experienced team.” Mahajan at Deloitte argued that costs for adaptive reuse and restoration are 16% cheaper than new, and can be done in 18% less time, and MGAC seems to agree with this assessment, at least for certain types of projects.

Using MGAC’s midpoint high/low costs per square foot, these are some rule-of-thumb reuse versus new build savings estimates, using the example of a >50,000 SF building in the Mid-Atlantic region.

1. Higher education classroom: New Build, $487 per SF. Historic Adaptive Reuse, $400 per SF, an 18% savings.

2. High school classroom: New Build, $400 per SF. Historic Adaptive Reuse, $325 per SF, an 18% savings.

3. Commercial Office: New Build, $275 per SF. Historic Adaptive Reuse, $262 per SF, a 4.5% savings.

4. Museum: New Build, $1,000per SF. Historic Adaptive Reuse, $750 per SF, a 25% savings.

But Fox warned that on adaptive projects, it’s best to be prepared for higher unexpected costs. While project contingency costs for new projects are usually budgeted at around 3 to 6% based on project size and complexity, on historic projects it is prudent to set aside 7 to 10% for the unexpected. Expert risk assessment and the availability and quality of original blueprints and previous building surveys are helpful here. In a similar vein, while change orders on new build projects usually account for 5 to 8% on new build projects, it’s best to double that for reuse projects. Setting aside 10-15% of construction cost for change orders and spending time and money upfront on probes, surveys, and investigations can pay significant dividends as the project begins.

What Are Some Innovative Adaptive Reuse Ideas?

Looking to start investing in distressed, underused or REO property? Here are a few ideas to get you going.

  1. The use of old warehouses and distribution centers for indoor agriculture and aquaculture.
  2. Redevelopment of an underperforming hotel into student housing.
  3. Conversion of abandoned industrial space into high end live-work lofts.
  4. Converting vacant urban land into agricultural use, and transforming warehouse facilities into indoor urban farms.
  5. Repurposing a historic civic building into a museum.
  6. Transformation of an unused retail site into a warehouse and distribution facility.

Hot Markets in 2023

Speaking of distribution, right now, in 2023, Avison forecasts that with high demand, rising rents, and vacancy rates of under 6%, the Oakland, California industrial and warehouse market in the San Francisco Bay Area can safely be described as a “hot market.” Demand, combined with the lack of vacant land in the area, is prompting developers there to repurpose older, vacant facilities to build class A warehouse and distribution projects. In 2019 the PWC Urban Land Institute noted the trend toward a new market equilibrium being established in retail with fewer square feet of retail space per capita. Unneeded retail space was predicted to be repurposed or replaced with new uses.

This trend can only accelerate because the United States has long supported retail space per capita levels that were actually multiples of what has existed in other developed countries. Retail has long been overbuilt. The quip is that retail “is not overbuilt, but under-demolished.” And online shopping is now crushing it.

Current Examples of Adaptive Reuse

There are many good examples of malls being repurposed into mixed-use developments such as apartments, collaborative office spaces, retail and entertainment spaces, often with civic amenities. Some prime examples of this are The Highland Mall in Austin and The Cinderella City Mall in Englewood, Colorado.

Look for Opportunity Zones

Some of the best places in the U.S. to scout for adaptive reuse projects are opportunity zones. These areas provide several scalable tax incentives for investors to re-invest their unrealized capital gains.

According to the December 2018 Smart Growth America report on National Opportunity Zones, of the over 8,700 opportunity zones in the US, these are the top ten; with the strongest potential for smart growth:

  1. Portland Downtown
  2. Downtown Oakland
  3. Downtown Seattle
  4. Center City East Philadelphia
  5. Inner Harbor Baltimore
  6. Downtown Newark
  7. Downtown Detroit
  8. Jersey City
  9. Downtown St. Paul Minnesota
  10. Wilshire Central BID Los Angeles

When taking office, multifamily and retail asking rents into account, SmartGrowthAmerica’s 2018 report placed all top ten U.S. opportunity zone markets in the U.S. in New York City; with Flushing and Hudson Yards topping the list.

Look Out for Smart Buildings

Another factor to consider is that construction, whether new, rehabilitative or adaptive, provides the opportunity to transform systems into more intelligent and sustainable ones.

A study from MIT noted building owners receiving 37% higher rent for smart buildings than non-smart. The European Commission has reported that intelligent buildings can command an estimated 11.8% more in lease value and 5% to 35% higher sales value. Research by Dr. Alexander Reichardt of the EBS Business School in Wiesbaden also cited numerous studies that confirm higher rents and greater tenant satisfaction in buildings that are certified as energy efficient and sustainable. A win for all.

Is Adaptive Reuse for You?

Adaptive reuse typically requires community engagement and awareness of issues like zoning. There are many great redevelopment projects on the shelves of city planners all across the nation, waiting for investors ready to take action.