15% Cap Rates And Circadian Lighting: How To Make Adaptive Reuse Work

The math to breathe new life into old properties is brutal.

“The dirty little secret of adaptive reuse is that somebody has to lose a lot of money in order for adaptive reuse to work,” The Shops at RedBird CEO Peter Brodsky said during Bisnow’s DFW Adaptive Reuse Event on Tuesday at The Pittman Hotel in Dallas. 

Older buildings often provide authenticity that can’t be manufactured, so with the right tenants, unit mix or creative redevelopments, such projects can turn heads and win hearts. 

But many of these buildings in Dallas-Fort Worth have to be immediately dismissed due to the high costs associated with a possible conversion, Harrel Group CEO David Harrel said. 

“From an investor standpoint, if you don't have a 12% or 15% cap on the deal, it's probably not going to get across the desk,” Harrel said.

The best way to turn an adaptive reuse project into a moneymaking venture is to acquire the property at a very low cost, which likely means the previous owner will have to take a bath, Brodsky said.

He secured a bargain-bin price for the 1M SF former RedBird Mall in Southern Dallas, where his firm transformed a former Sears building into a 150K SF medical facility for UT Southwestern. 

Empty malls are perceived to have no value. But they are large, sturdy buildings that are well-located with a lot of parking. Even when they need to be completely redone, malls can be acquired at a fraction of replacement cost, Brodsky said. 

Interest rates and the cost of construction are making it even more difficult for developers to afford to purchase buildings and fund the work to reinvent them.

That is preventing smaller firms from breaking into the space.

Many mom-and-pop firms are facing significant challenges due to the need for high rents, expensive construction and costly updates to meet fire code and the Americans with Disabilities Act, Harrel said. 

Instead of trying to find a way to get around ADA requirements, he said investors just have to be able to afford them to move forward.

On the multifamily front, unit mix and unit sizes are one way to help projects pencil, STO Building Group Senior Vice President of Building Repositioning Brooks McDaniel said. 

“We did one project that was 80% studios,” McDaniel said. “It's kind of driven by the fact that your smallest unit will always be the one that generates the most revenue per square foot.”

Once a conversion is completed, it often takes three to five years of lower rents to determine whether an office or retail tenant can be successful in an adaptive reuse project, Harrel said. He singled out the cities of Richardson and Garland for offering incentive packages that helped pay for different aspects of recent projects.

Taco y Vino got an “amazing incentive package” that was instrumental in transforming a former 1,300 SF barber shop into a thriving Downtown Garland asset, Harrel said. 

In addition to economic incentives, Garland Assistant City Manager Andy Hesser said municipalities can use tax increment financing districts, revitalization grants and Chapter 380 agreements to help adaptive reuse projects along. 

Another way to ensure adaptive reuse projects are positioned for the future is through public-private partnerships. The $1B Collin Creek Mall redevelopment in Plano, for example, is a joint venture between the city of Plano and Centurion American that involves millions of dollars of public funds.

After years of work, Centurion American President and CEO Mehrdad Moayedi said he expects the redevelopment’s first retailers will open within the next 12 months.

Beyond deep pockets and public assistance, developers need unique visions. 

Developer Jack Matthews’ creativity was a key ingredient in the rise of the Cedars area of Dallas. He bought a former Sears warehouse and turned it into the South Side on Lamar apartment building. 

“That catalyzed a rejuvenation of a neighborhood that had really fallen into hard times,” Brodsky said.

While most of the best-suited office buildings have already been converted, DSGN Associates principal and Director of Sustainability Beth Brant said there are still opportunities for adaptive reuse projects in the region. She has seen creative ways of working with buildings that have large floor plates, which are typically difficult to convert to multifamily. 

Light wells were added to the 10-story Mayflower Building in Downtown Dallas when it was converted from an office building to multifamily. Brant said circadian lighting, which mimics daylight, can also be used to make buildings work as apartments. 

At its best, adaptive reuse creates buildings that have a lot of character, Brodsky said.

“They just don't make them like that anymore,” he said. “You can't afford to use the same materials, unless it's super, super duper high-end.”

When developers can pair that character with a desirable location, a project’s popularity can explode. Brant said the youngest renters are looking for properties with some personality and access to everything they need to live their lives. 

“The idea of the commute is pretty much dead, especially for the younger generation,” Brant said. “They don't want to drive an hour to get to work and come back.”