How Adaptive Reuse Can Work in Industrial Real Estate
Adaptive reuse is the repurposing of an existing building for a different use than it was initially intended — also known as a building conversion.
What Is Adaptive Reuse in Industrial Property Investing?
An adaptive reuse is the repurposing of an existing building for a different use than it was initially intended. Also known as building conversions, this practice is especially important for industrial investors to understand, given how frequently different types of industrial properties are converted to other types of assets. In recent years, adaptive reuse projects to transform non-industrial properties into distribution centers have also taken off.
Examples of Adaptive Reuse
The tri-state area around New York City is home to potentially the largest array of adaptively reused properties in the country — particularly those converting historic warehouses into office, retail, and even multifamily properties. One great example of an adaptive use project can be found in the region: Ironside Newark in Newark, N.J.
Edison Properties had acquired a warehouse built in 1907 and converted it into a seven-story, 456,000-square-foot mixed-use property with office and retail space in the heart of Newark. When the industrial property was originally built, the district was predominantly filled with manufacturing and distribution buildings, but in today’s landscape, this space was no longer needed.
There are many reasons why an investor or developer would consider an adaptive reuse project instead of a ground-up development. However, there are also some potential drawbacks.
Challenges of Adaptive Reuse
Older properties may not meet building codes
Structural issues may not be apparent
Rehabilitation costs can be difficult to estimate
May be more difficult to finance than ground-up construction
Generally superior locations
Historic tax credits may apply
Resilient building materials in place
Incentive programs may permit zoning flexibility
What is adaptive reuse in industrial real estate?
Adaptive reuse in industrial real estate is the process of converting an existing industrial building into a new use. This can include repurposing an old factory into a modern office space, converting an old warehouse into a retail space, or transforming an old industrial building into a residential complex. Adaptive reuse can provide significant cost savings compared to demolition and new construction, and can also help preserve the historic character of a building. Additionally, many cities are willing to relax zoning ordinances for adaptive reuse projects, allowing developers to take advantage of tax credits and other incentives.
What are the benefits of adaptive reuse in industrial real estate?
Adaptive reuse in industrial real estate can provide a variety of benefits for investors and developers. Some of the most common benefits include:
- Excellent Locations: Many older industrial buildings are located in highly desirable areas, such as city centers. Even if it is not located in a city’s urban core, an older building in a neighborhood with rapidly increasing commercial rents may be an excellent candidate for repurposing and rehabilitation.
- Superior Building Materials: While older buildings can have a variety of issues, many older structures are built with materials such as stone, which is incredibly sturdy and can lead to significant energy savings when compared with recently constructed buildings.
- Zoning and Permitting Flexibility: Certain cities, such as Los Angeles, have special adaptive reuse incentive programs, which relax density, parking, and accessibility requirements, as well as other zoning ordinances, while also making it easier and faster for developers to obtain permits for adaptive reuse projects.
- Historic Tax Credits: The federal Historic Tax Credit (HTC) allows investors who support the rehabilitation of eligible historic structures to deduct 20% of the project’s qualified costs from their federal income tax liability. In addition, many states have similar historic tax credit programs that can be paired with the federal HTC in order to maximize investment returns.
What are the challenges of adaptive reuse in industrial real estate?
The challenges of adaptive reuse in industrial real estate include difficulty in staying in compliance with building codes, especially those regarding safety and accessibility. Older buildings may contain fire safety and life hazards, such as asbestos, and often lack modern fire safety systems and fire-resistant construction features. In addition, older buildings are less likely to have accessibility features such as ramps, elevators, and handicap parking. While it’s true that some cities are willing to relax zoning ordinances for adaptive reuse, investors and developers should still keep these potential challenges in mind when deciding to go forward with an adaptive reuse project.
What are the best practices for adaptive reuse in industrial real estate?
The best practices for adaptive reuse in industrial real estate depend on the specific project. Generally, investors and developers should consider the potential challenges of adaptive reuse, such as staying in compliance with building codes, especially those regarding safety and accessibility. In particular, older buildings may contain fire safety and life hazards, such as asbestos, and often lack modern fire safety systems and fire-resistant construction features. In addition, older buildings are less likely to have accessibility features such as ramps, elevators, and handicap parking.
When considering an adaptive reuse project, investors and developers should also take advantage of various state and federal tax credit programs, such as the federal Historic Tax Credit (HTC) program. This program can help offset the costs of adaptive reuse projects.
Finally, investors and developers should consider the potential benefits of adaptive reuse, such as significant savings on demolition and new building construction costs, as well as the potential to attract and retain tenants due to the historic past and pleasing aesthetic qualities of the building.
What are the most successful examples of adaptive reuse in industrial real estate?
The most successful examples of adaptive reuse in industrial real estate include the adaptive reuse of old warehouses and factories into modern office spaces, retail stores, and residential units. For example, the adaptive reuse of an old warehouse in San Francisco's Mission District into a modern office space for tech companies has been a great success. Additionally, the adaptive reuse of an old factory in Chicago into a modern retail space has been a great success. Finally, the adaptive reuse of an old factory in New York City into a modern residential complex has been a great success.
For more information on adaptive reuse in industrial real estate, please see the following sources:
What are the financing options for adaptive reuse in industrial real estate?
Financing options for adaptive reuse in industrial real estate vary depending on the project and the investor's goals. Generally, investors can use traditional financing options such as bank loans, private equity, and government grants. Additionally, investors may be able to take advantage of special financing programs such as the federal Historic Tax Credit (HTC) program, which allows investors to deduct 20% of the project’s qualified costs from their federal income tax liability. In addition, many states have similar historic tax credit programs that can be paired with the federal HTC in order to maximize investment returns. Source