How to Repurpose Commercial Real Estate and Save on Development Costs

Although transforming raw land can prove lucrative, repurposing existing building space to meet market demand has created exciting opportunities for the willing investor. This article dives into adaptive reuse trends and the benefits of repositioning the assets of an existing commercial space to accommodate the needs of a community while accelerating your business.

Adaptive Reuse in Real Estate | Trends

From office remodels to storefronts changing hands, reimaging a building’s use is commonplace in the real estate industry. This flexibility to transform spaces isn’t limited to these minor adaptations. Adaptive reuse in real estate to repurpose a structure that meets a specific market demand is trending as a whole as an alternative to new construction. In response to market demand, an opportunity arises to flip sub-utilized spaces as a savvy business strategy. Imagination and market awareness play a key role in taking advantage of these opportunities and benefits.

For context, here are some examples of investors accelerating business with successful and creative property redevelopment opportunities while meeting a community need:

• The Broadway Autopark in Wichita, Kansas, was a parking garage turned popular apartment complex. 
• America’s oldest mall transformed into micro apartments.
• Amazon converted upwards of 20 aging shopping malls into distribution centers.

Adaptive Reuse Solves Real World Problems

Underserved markets and underutilized properties resulting from global pandemic market reactions pose concerns for local communities. Investors can help mitigate these concerns by understanding the market demand and options available.

Affordable Housing

The housing sector is one of the most persistent and pressing market demands. The National Low Income Housing Coalition states that it will require constructing 7 million more homes to meet this urgent demand for low-income housing. For investors, being aware of the market demand allows for creative solutions such as adaptive reuse that can create a straightforward path toward accelerating business growth while filling this gap in the housing market. For example, that creativity in adaptive use can translate to converting older motels and hotel buildings into apartments. These hospitality accommodation transformations could support student, senior, and low or mixed-income housing needs.

Similar to repurposing hospitality structures into housing options, many underutilized commercial spaces, including office buildings, parking garages, and shopping malls, can be converted into multifunctional spaces that include housing.

With regard to the need for more affordable housing, the National Association of REALTORS® speaks to the necessity to support investors in repurposing commercial real estate:

In addition to converting commercial and hospitality structures, investors can also consider the opportunity to repurpose historic buildings into rental housing. Many municipalities recognize the value-add to their communities and encourage investors to participate through local and federal tax incentives.

Summarily, multifamily housing continues to be in very high demand nationwide, priming savvy investors to take advantage of existing commercial spaces with a solid infrastructure to meet market demand and save on the costs in comparison to new development.

Housing Options Created by Mixed-Use Zoning

Multi-purpose real estate investing is a creative and often lucrative approach to repurposing commercial real estate. Many investors have successfully renovated structures to create spaces that serve multiple purposes all under one roof. One model would be to convert an existing multilevel property into a multi-use property, adding apartments on the top levels with retail or office spaces on the ground level.

Mixed-Use Development Benefits

Developing mixed-use properties not only benefits local economies but can be a win-win for both investors and community members.

Some of these benefits of mixed-use properties include:

• Continuous water and electrical service are convenient to install and maintain throughout.
• Mixed-use properties increase revenues of small businesses adjacent to the housing units.
• Mixed-use buildings encourage economic growth and expansion of downtown areas while preserving the city’s cultural centers.
• A commercial and residential mixed-use property can lend to an atmosphere of prosperity, liveliness, and community. 
• Walk-ability scores increase and they promote the local health of residents via pedestrian and bike travel.
• Multi-use development can increase a city’s livability ratings by offering sought-after conveniences for residents, especially if the investor considers amenities like green spaces and recreational opportunities.

Mixed-use developments have a more specific and intentional use of space which is aesthetically pleasing, efficient, and cost-conscious. In turn, can spawn a continued cycle of investment by increased demand created by these listed benefits.

Taking Financial Stock: Repurpose or New Construction?

There are clear financial benefits to repurposing existing commercial real estate buildings compared to new construction. Although some components may need to be modified, the initial construction design absorbed initial building and infrastructure costs such as the foundation, framing, electrical, septic system, municipal water and sewage hookups. With those in place, repurposed buildings need only modification from the original building footprint instead of extensive groundwork.

Adaptive repurposing requires fewer material resources than building new, a factor when considering a return on investment. Regardless of the amount of material needed, the aftermath of COVID-19 has demonstrated that international supply chain delays for materials such as steel, lumber, and aluminum raise the costs, both financial and efficiency, for builders. Minimizing global procurement of materials increases efficiency, translating into more significant profit margins for investors. In short, the less material required, the more opportunity to source those materials locally, avoiding potential delays and undue expense. 

When calculating time-to-completion for adaptive reuse or commercial mixed-use development, be aware rezoning permits may add to the completion time. However, with intentionality, the transition can be streamlined and affordable while working efficiently into your timeline.
In light of all the considerations, many agree that property redevelopment is less costly than new construction. Deloitte cites, “costs for adaptive reuse and restoration are 16% cheaper than new, and can be done in 18% less time.”

The Takeaway

Development cost savings is an obvious benefit of adaptive reuse in real estate. Other benefits include possible tax incentives and faster completion times compared to new construction. Whether its commercial property turned into residential housing or shopping malls converted to office spaces, when you’re looking for your next investment, repurposing an existing building can support your business objectives while providing an excellent service by increased market supply and community enhancement. With this in mind, talking with a market expert is a surefire way to make a wise decision about repurposing commercial real estate.

Contact the Broadmark Realty Capital team to finance your next asset repositioning investment opportunity.