At present, there are numerous commercial properties in primary and secondary cities that have outlived their usefulness.
Whether it is because of higher costs, changing tenant demands, or tenants choosing more eco-friendly buildings, there are numerous multifamily, office and retail properties that easily lend themselves to higher cash returns if repurposed for a different use.
Although this trend is especially popular in urban areas, it actually isn’t new. In the multifamily real estate, in particular, investors have always retrofitted properties that no longer served their original purpose as a non-residential property.
At the moment there are two types of commercial properties in particular that are finding new and better uses.
Mall Owners Are Turning Towards Experience-Based Tenants
The first type of commercial properties is sprawling suburban malls, of which there are thousands sitting empty around the U.S. Creative investors have acquired these expansive properties and begun adding more experience-based tenants.
Churches, fitness centers, offices, public libraries, tax preparers, and medical centers are just some of the tenants now being wooed to these re-invented spaces. In fact, according to the Urgent Care Association of America, 30% of urgent care centers are located in shopping malls, and another 20% are located in mixed-use buildings.
Some, such as the Providence Arcade Mall in Rhode Island, have converted space into micro-apartments, while other malls are turning to experienced-based businesses to fill empty space such as food courts.
Penn-Can Mall in Syracuse, New York turned its atrium space into a car dealership, while Cool Springs Galleria in Franklin Tennessee turned its gallery space into a space that showcases artwork for local artists – one which has sold over $20 million in the artwork.
Older Buildings Are In Demand Again
The second wave of commercial properties is located in urban areas.
These are generally older buildings that were abandoned either because businesses fled to the suburbs, or because tenants preferred newer commercial properties with premium amenities.
Now, these same buildings are valued for their architectural features, prime locations, and historic value. Others are of value simply because of their size and location. There are a host of warehouses, for example, in urban areas that are now particularly attractive to e-commerce companies looking to store product closer to cities.
Amazon is one example most investors will be familiar with: in the rush to find properties close to urban centers to fulfill same-day and next-day shipping, entire cities around the U.S. came forth to woo the mega-business to their area.
But Amazon isn’t the only online e-commerce company seeking to add brick and mortar properties to their portfolio. Other online companies, as well as some brick and mortar businesses, have shifted to a mixed offline/online model.
Recognizing that customers do like to try on or try out products, may allow customers to order a product online, and pick it up at a nearby store. This allows customers the chance to view the object or try it on, and if necessary to exchange the product if they’re unhappy with it.
Once customers enter the store, tenants are offering a host of incentives in order to keep them longer and encourage them to look around. Surprise discounts that activate when a customer enters the store, DIY classes and food tastings are just some of the tactics being used to create experiences customers will stay for.
For both of these trends, investors and developers have discovered that in order to find properties that will allow them to add value or make a significant profit, they are being forced to move further away from main commercial neighborhoods.
Since moving further away from main commercial areas decreases the desirability of the property, investors are willing to renovate an older structure instead.
From a financial standpoint, this makes sense.
These types of properties can be bought for much less than other newer properties in the same area, and even when you take into consideration the cost of renovations, the fact that the property is located in a desirable area means it has a high likelihood of producing good returns.
New construction, on the other hand, must take into account the high cost of land plus the cost of building from scratch. This can blow up the price significantly, creating slim margins for developers.
Analyzing Prospective Commercial Properties
If you’re an investor considering adaptive re-use, there are several factors you should look for when considering older properties.
1. Look for Unusual Architectural Features
As an investor, you may be tempted to gut a building and replace it with all-new features. Instead, consider leaving important or interesting features in place.
Tenants appreciate it when historic details are honored by leaving them in place, and it gives character to what would otherwise be a plain vanilla property. The best way to do this is to try and balance the old with the new, allowing the older details to inspire the newer construction, while adding newer systems that improve the functionality of the building.
2. Plan Without Specific Tenants in Mind
Although you may already have tenants interested in the property, your best bet is to be flexible when planning how space will be divided up and used.
Instead of planning for specific tenants, create different-sized spaces that can suit a variety of tenants. Planning for different tenants also means you’ll need to consider plumbing, electrical, and other infrastructure that might be required; you can always customize a space for a particular tenant later.
3. Ensure the Entire Site is Attractive to Future Tenants
Investors considering adaptive reuse should also make sure to consider the site in addition to the property itself.
Is there enough parking? Too little parking means both employees and customers will be frustrated. In the case of malls, the opposite is often the case: too much parking. If so, perhaps the area can be utilized more effectively by including walkways, areas for people to congregate, or outdoor eating areas for specialty restaurants.
Can you add landscaping features that add to the external appeal of the property? Is there a way to incorporate eco-friendly features that will not only save money but also attract premium tenants?
All of these factors need to be considered when renovating a site in order to achieve maximum usability.