We’ve been talking about adaptive reuse in commercial real estate recently. It is the repurposing of an asset from one use—could be office—to another use—could be residential/multifamily.
The chain of events starts with a drop in value of the asset itself. And that value has to fall enough whereby the capital that you reinvest into that asset to convert it into something else has to be sufficiently low to support the new economic model that will work in that building.
It’s happening across American cities because the demand for office buildings has gone down.
The Physical Challenge
An office building, when it’s built for purpose, has big open floor plates that allow people to sit in a collective environment. Column spacing is important so you have unobstructed views across floors.
Now it’s going to house maybe 20 apartments.
And within those apartments, every single apartment has to have at least one bathroom. So that means drilling through the concrete, and that drilling through your concrete puts at risk hitting the rebar, which is the strengthening of the concrete.
And if you hit that too many times, you’re going to weaken your structure.
It’s a very complex undertaking, and as a lender, I would only lend to someone who has done it numerous times before because of that complexity; someone who’s experienced the things that can go wrong.
Breathing New Life into Neighborhoods
The way I think about it is, it’s a healthy regeneration of life within an urban environment. If it is done well, it can change the makeup of an area from a live-work-play standpoint. It breathes new life into an area. And then from a city economic standpoint, that obviously regenerates the tax base, which helps the city function.
I think of it as one of the early signs of green shoots of a market recovering. Adaptive reuse is never the ideal fit for purpose starting point, but because it has a shortened timeline, because a building exists, it represents the shortening down of the development cycle. And that’s the first place people will go for value.