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‘It’s All About Value Engineering’: One Industry Expert Weighs In On The State Of The Adaptive Reuse Market


As cities across the country grapple with how to deal with vacant commercial spaces, commercial real estate professionals are increasingly recognizing adaptive reuse as a way to give unused buildings a new purpose.

Nationally, nearly 17% of office space remains empty due to long-lasting impacts from the pandemic. Brick-and-mortar retail was also dealt a pandemic-induced blow, as Americans re-evaluate their relationship with retail and its value as an investment — leaving room for these properties to be converted into spaces that can meet the evolving needs of today’s CRE market.

Apartment conversions have reached record highs, with more than 11,000 apartments converted from office buildings in the past three years. Meanwhile, due to the vast square footage of retail stores, some of these spaces are transitioning into industrial facilities, as e-commerce and reshoring efforts become increasingly prevalent.

While this signals great promise for struggling CRE assets, some developers may need assistance securing financing and assessing business plans for adaptive reuse developments. That’s where Stonehill, part of Peachtree Group — a direct CRE lending and debt financing firm that concentrates on heavily transitional assets — comes into the equation.

“Repurposing assets is the name of the game right now in CRE,” said Daniel Siegel, president of Stonehill’s commercial real estate lending group. “Given current market conditions where there's a need for multifamily housing and industrial space, it's important to figure out how to cost-effectively change a building’s use.”

Stonehill is a CRE, hospitality and PACE lender that provides its clients with financing and preferred equity investments secured by real estate assets. Founded in 2013, the firm has completed nearly 500 transactions and $5.2B in loan volume.

Siegel said that when most people think of adaptive reuse projects, they think of trendy office space or apartment buildings that have been converted from old warehouses. While oftentimes the uniqueness and originality of these spaces is what’s attractive to tenants, what some neglect to remember is that these types of projects usually come with a hefty price tag that can either make or break a project. 

“There’s a wide variety of assets where their functional uses are down, chiefly office and retail space,” he said. “What’s important to remember, though, is that it’s all about value engineering, especially in a saturated market. The cost of construction materials is elevated compared to historicals. Each project has to be attractive enough on a per-square-foot basis in order to make sense.”

Siegel added that to be successful in the adaptive reuse market, developers must convert a space that's market feasible, while also being at a reasonable price point — something that may prove to be difficult in a market where capital is becoming more expensive. The opportunity in this market isn’t a transformative food hall, but rather smaller budget projects.

“A feasible example of an adaptive reuse business plan in this market is hospitality-to-multifamily conversions for a few reasons,” he said. “Firstly, there’s an existing product already there, you’re not doing any ground-up construction. Additionally, there’s usually an affordability component to these types of transactions.”

Siegel added that once these units are rented, the affordability component to these types of transactions makes them more liquid on refinance. There’s also a greater appetite for multifamily conversions from the capital markets, especially banks, he said.

From a patronage standpoint, there is a need for business owners to provide a space that tenants and employees will genuinely enjoy, Siegel said. New builds often do not have the same appealing effect that adaptive reuse projects do. 

With cost and market-driven demands in mind, the adaptive reuse market will remain strong looking forward.

“This year and beyond, the conversation will revolve around value-engineering,” he said. “I think we will see a lot of activity in old retail buildings being converted into self-storage and industrial facilities, along with offices to multifamily and self-storage. Overall, the outlook is strong despite the cost hurdles or market conditions that may hamper development.”

This article was produced in collaboration between Stonehill and Studio B. Bisnow news staff was not involved in the production of this content.

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