What Granite Properties Learned From Making Something Old New Again
Granite Properties’ redevelopment of a historical property in the West End Historic District was a departure from the norm for the commercial real estate firm. A few expensive surprises provided a challenging learning environment, but one that should benefit the company on the next adaptive reuse deal ... if it tries adaptive reuse again.
The developer, investor and manager of commercial real estate has long been known for its sleek Class-A office projects in high-end suburbs such as Granite Park in Plano. In August, Granite and joint venture partner Endeavor Real Estate Group plan to break ground on a glitzy 20-story, 329K SF trophy office building in The Gulch neighborhood of Nashville.
But back in 2015, the company decided to try something different. Bidne talked with Bisnow about what Granite learned through the two-year redevelopment that wrapped up last fall.
The idea to do an adaptive reuse project began to form about five years ago when Granite was considering expansion into other markets and was touring cities on the East and West coasts.
“We started seeing really cool, creative repositionings in markets like San Francisco, Boston and Chicago,” Bidne said.
“In a lot of those instances, those creative office spaces that had an old historical feel were actually getting rent premiums over new construction. Not only were they really cool, genuine-feeling spaces, they were also creating an investment opportunity that was attractive. That’s what really started us thinking about this,” he said.
Granite eventually expanded to three markets: It re-entered Atlanta, a market that it had previously exited, and entered Los Angeles and Boston. (It already had operations in Dallas, Houston and Denver.)
But the company discovered its first — and so far only — historical redevelopment project in its hometown in the faded West End Historic District. In the 1980s, the West End was an entertainment destination, and the building Granite bought, the West End Marketplace, was the center of activity with multiple venues inside, including shops, a theater and nightclubs.
By the 2000s, the circa 1903 property had fallen on hard times and it had been vacant for about 10 years when Granite bought it.
“The scale of that building was such that unless it came back the rest of the neighborhood wasn’t going to come back so it was an opportunity to come in and get a critical mass quickly that could be influential in turning the neighborhood around,” Bidne said. “That’s what we saw as the opportunity.”
The surprises were nearly immediate. Not long after buying the building, a thunderstorm caused a portion of the roof to collapse, which knocked a beam loose that then dislodged sprinkler pipes. A flood ensued.
Later, as contractors started gutting the building and cutting through the slab for installation of new elevators, Granite discovered the building had multiple foundations layered atop each other.
One of the most unusual finds during the elevator excavation was a pipe sticking out of the ground that turned out to be a 700-foot-deep water well. A state environmental agency had to be called out and a qualified contractor found to cap it.
“Unfortunately, we did run out of contingency and had to relook at the investment underwriting. Fortunately, the lease rates that the market was able to provide increased from the time we purchased the building to the time we started to lease it, so that softened the blow.”
The 215K SF Factory Six03 officially opened in November. It is about 35% leased and asking rents are low $30s triple net, below Uptown but top of the market for the West End.
The project was certainly a learning experience, Bidne said.
“If I were to do it again, I would completely finish the peeling back of everything and not start trying to do the new improvements until I was all the way down to the bare bones structure. I think we tried to go a little too fast,” he said. When various problems were discovered, redevelopment had to stop.
“One of the lessons learned is to be patient.”
Jim Lake, CEO of Jim Lake Cos., is a Dallas icon in adaptive reuse of historical buildings. Lake redeveloped Bishop Arts, Jefferson Tower, Waxahachie’s downtown and is redeveloping The Ambassador. Lake’s wife and fellow aficionado of all things old, Amanda Moreno, has just started redeveloping Ennis’ historic downtown.
With historical redevelopment, surprises just go with the territory, they said.
“In most cases, you would probably double or triple your contingency and that is still usually not enough,” Lake said.
Bidne said Granite has looked at a few other opportunities, but hasn’t yet found the right fit from a return-on-investment standpoint.
“Even though we are exceedingly proud of what we were able to do with Factory Six03 and its community impact, we weren’t doing it to be altruistic," Bidne said. "We saw an opportunity in the marketplace to take advantage of trends that could provide a risk-adjusted return. I think the best hope these great old buildings have to be preserved is for developers like us to see them as both economic and social treasures."
Factory Six03 "gave us enough hard lessons to be cautious in the future," Bidne said. "At the same time it would be a shame to have survived those battle scars and not take advantage of them on another opportunity."