Chicago's Adaptive Reuse Experts Say Repurposing Is Not For The Faint Of Heart
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Adaptive reuse of older real estate comes with more inherent risks than the ground-up variety. And the panelists at our Chicago repositioning and adaptive reuse event at the Loews Chicago Hotel yesterday said they would not have it any other way.
3L Real Estate founder and CEO Joseph Slezak said one of the biggest challenges in converting a commercial building to residential is opening the municipal code book and dealing with the requirements. The historical preservation process adds time to any project and is very defined when it comes to the preservation process, but city codes can have a lot of gray areas. Landmarks experts can help developers navigate the waters so the dynamic of the property is not completely changed and the development remains economically feasible.
Slezak said 3L prefers residential redevelopments. The buildings offer charm and character, often in great locations that give future tenants a lifestyle choice that cannot be replicated with new glass towers. While 3L would love to have mixed-use components to its redevelopments, Slezak said the constraints of a building's shell can prevent that. To compensate, 3L chooses markets where the surrounding neighborhood can serve as an amenity.
Oxford Capital Group CEO John Rutledge has plenty of experience giving old buildings new life as hotels. Rutledge said older buildings make good candidates as hotels because that may be the only option to make the balance sheet work. It does not make sense to renovate Class-C offices for the same use, because a developer will not get the rents necessary to justify the expense. It is better to strip the building down and get market-leading rates by repurposing that building into a hotel.
The Prime Group CEO Mike Reschke said the math is simple. A well-located, empty office building that is upgraded to new offices may get a developer a 7% return on costs. Converting that same building into a hotel will net a developer a 10% return. Both Reschke and Rutledge have been aggressive with using tax credits as part of their developments' capital stacks. Reschke has used both historic and new market tax credits in his projects, which he said reduces the amount of equity needed to get a project underway. On the debt side, Reschke said there is no shortage of investors looking to deploy capital.
K Giles owner Keith Giles said putting together the financing for an adaptive reuse project can be challenging, because there are limited financing sources. Institutional lenders and investors consider adaptive reuse to be a riskier investment. Giles said the more demolition a developer can do before repurposing a building, the better that developer will be. Giles cited his experience repositioning the Old Colony building as an example. Many of the walls turned yellow as Giles was finishing the building, due to a chemical that comes with older plaster. That cost Giles around $500K to fix.
Sometimes the surprises are even larger: Crews discovered a dead body inside 833 South Michigan Ave. when that building was being renovated.
Baum Revision principal David Baum said adapting old buildings can come down to being a branding exercise. Baum Revision is working on a project in Madison, Wisconsin, where the firm is adapting a former feed mill into a food hall. Baum said the mill's interior and exterior better reflect on what the food hall's tenants are doing than just shoving them all into an institutional white box. He said companies thinking about their customer and employee bases would do well to think about how their public face interacts with the public.
One of Baum Revision's higher-profile redevelopments is the Mil-West, the Margie's Candies building in Logan Square. Baum said construction is progressing nicely and discussions with prospective tenants are ongoing.
Spirit Investment Partners principal David Nachman prefers midcentury modern buildings that his firm can repurpose into multifamily. Over the past two years, Spirit acquired a 223-unit building at 5220 North Sheridan Road and a 160-unit building at 6807 North Sheridan. In previous lives, these buildings were hotels, so the sizes of the living units and common areas are perfect for updating for the modern apartment renter. Common areas can be repurposed into lounge areas and fitness centers.