“Adaptive Reuse” and Why It’s an Investment Opportunity

Real Estate News: Real Estate Investing Podcast

A lot of the nation’s empty commercial space is being put to good use. A recent report by RentCafe shows a huge surge in the conversion of vacant commercial buildings into apartment complexes. This so-called “adaptive reuse” trend began more than a decade ago, but accelerated substantially this past year, especially for the conversion of unused office space.

Hi, I'm Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review.

A recent report by RentCafe says that, by the end of this year, developers will have created 20,100 residential units within old commercial buildings. Add that number to the 12,000 units created last year, and the decade kicks off with a total of 32,000 apartments created by converting commercial buildings into apartment homes.

Decade-Long Trend

According to RentCafe, it’s a trend that began in 2010 with 5,200 conversions. Back then, hotels were the most popular kind of building to convert into apartments. Old factories and office buildings were also popular, but not as much as hotels.

There was a steady increase of conversions each year through 2017, which logged about 15,500 conversions. The numbers fell in 2018 through 2020, and blasted off again this year, especially for the conversion of old office buildings. RentCafe says that 41% of the units created during that last two years were formerly used for office space.

It’s been a good opportunity for developers and investors, because adaptive reuse is less costly than ground-up construction, especially with supply chain issues that are holding up new projects. It’s also a more earth-friendly option.

Lower Environmental Impact

North Carolina city planner, Emil Malizia, told RentCafe: “Perhaps the most compelling reason to choose adaptive reuse for apartments versus new apartment construction is the lower environmental impact, especially if demolition is involved.” He says: “Adaptive reuse mitigates climate change; demolitions and new construction do not.”

Cost Savings

The cost savings are also impressive. Malizia says that adaptive reuse can lower construction costs by as much as 30-40%, so long as the cost of the site and the building is not a lot more than a piece of undeveloped land. And right now, it might even be easier to secure an old building than a plot of land, especially if the current remote work trend continues. Companies are changing the way they do business, thanks to the pandemic, and reducing the number of private offices they maintain.

Unused Office Space

As CNBC reports, office vacancy rates remain high in many U.S. cities, so building owners have been scrambling to put them to use. And we’re likely to see even more office space becoming available. A PwC survey says that about a third of the executives are expecting their office space needs to decrease over the next three years, because of remote workers. (2)

Although many renters fled from their city apartments during the pandemic, city life is bringing them back. And these commercial space conversions are providing a convenient option for returnees who want to live downtown, in or near the business district.

Because there is typically less housing in areas with a lot of office buildings, these conversions also offer a prime “location.” And when you have that, the opportunity for developers and investors can be lucrative.

Top Cities for Conversions

While this trend is surging in the U.S., it’s also happening more in some cities than others. For 2020 and 2021, the city with the most conversions was Philadelphia. Developers created almost 2,000 new apartments through adaptive reuse. Washington, D.C.; Cleveland; Chicago; and Los Angeles were next on that list. They all had more than 1,000 conversions over that last two years. Other cities with a lot of conversions were Alexandria, Virginia; Detroit, Pittsburgh, Kansas City, and New York City.

You can see the RentCafe report by following a link in the show notes at newsforinvestors.com. You can also join RealWealth, for free. As a member, you have access to the Investor Portal where you can view sample property pro-formas and connect with our network of resources. That includes experienced investment counselors, property teams, lenders, 1031 exchange facilitators, attorneys, CPAs and more.

And please remember to hit the subscribe button, and leave a review!

Thanks for listening. I'm Kathy Fettke.

Links:

1 -https://www.rentcafe.com/blog/rental-market/market-snapshots/adaptive-reuse-apartments-2021/

2 -https://www.cnbc.com/2021/11/24/a-record-number-of-office-buildings-turned-into-apartments-this-year.html