Adaptive Reuse Supplements Affordable Development Efforts
Experts weigh in on the benefits and challenges of converting various asset types to apartments.
Multifamily construction has sped up in the last two years to meet pandemic-fueled demand. At the same time, work-from-home arrangements that came as a result of the health crisis also spurred multifamily conversions across the country, predominantly from office buildings.
The adaptive reuse trend has been gaining steam, marked by a record year of apartment conversions. According to data provided by Yardi Matrix, approximately 20,100 of converted units—almost double the number of apartments converted in 2020 and 2019 combined—were completed in 2021.
Most of these multifamily conversions were former offices (7,400), industrial buildings (3,400) and hotels (2,850). It is expected that approximately 52,700 apartments will be converted in 2022.
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“Right now, it’s basically existing hospitality and Class A or B office space. I’ve seen hotels and offices converted into multihousing properties and, in some cases, large homes converted into a 10-person senior living or an assisted living home,” Ryan Kimura, senior vice president of Strategic Partnerships at Premier, told Multi-Housing News.
Ideally, there are several factors that must be considered in evaluating whether a building is a suitable candidate for multifamily conversion, according to JLL Capital Markets Director Alex Staikos. The company is currently arranging acquisition financing on behalf of Silverstein Properties and Metro Loft for the purchase of 55 Broad St., a late 1960s vintage office building in Manhattan’s Financial District that they plan to convert into 571 market-rate apartments.
While many office buildings work quite nicely for residential conversion, each building needs to be evaluated individually while taking into consideration the site context—walkability, access to transit, natural light, views—and building form, including the shape and size of the structure’s floor plates and how easy it is to plan efficient units. Large floors typically don’t work well for multifamily conversions since there is a lot of “deep” space far from windows, Staikos explained.
What works, what doesn’t
With an already existing building, the steel and concrete materials are already in place within the structure, and those materials are extremely expensive. Depending on the type of conversion, the public spaces that can be repurposed into shared amenities are already there, Kimura noted.
Adaptive reuse is also far more sustainable than building ground-up. Less waste is put into landfills and there is less carbon associated with new materials. A conversion is not only generally cheaper, but also quicker since its retrofitting an existing structure—while a new building may take three to four years to build, a conversion can be completed and ready to be leased sometimes in under one year.
“Adaptive reuse projects also provide design and development opportunities for unique residences, resulting in distinct marketing advantages over other residences. Repurposed historical properties maintain the cultural heritage of their communities and preserve aesthetic architectural features. Individuality makes units more intriguing, although customization can drive up project costs,” said Denver Brooker, principal at architecture firm Vocon.
The opportunities arising from these multifamily conversions are many, with the trend acting as a great way to indicate how affordable housing inventory can be created without the aid of federal funding programs, according to Repvblik Founder & CEO Richard Rubin.
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At the other side of the spectrum, one of the disadvantages to converting commercial structures to multifamily buildings is that the existing property wasn’t built for residential living. Therefore, each floor poses unique plumbing and electrical challenges. Kimura mentioned other downsides such as development delays due to permitting renovations. Oftentimes, this infrastructure is very dated, so a perceived saving can cost more than anticipated, Rubin added.
When faced with the same issue while working on its BVQ Lofts project—where a large percentage of the masonry walls required repair or complete reconstruction—Vocon reframed the floors and rebuilt the top half of the second-floor masonry walls and parapet in one wing of the building.
Historic tax credit projects require historically accurate replacement windows, which typically account for a significant percentage of project cost. Similarly, projects with historically exposed uninsulated masonry exterior walls must remain exposed, limiting options for increasing building envelope performance and enhanced roof insulation, Brooker explained.
“Technology poses another challenge when converting offices to multifamily developments. Some of these existing buildings lack adequate Wi-Fi signals necessary for a new multifamily building. Office buildings are usually built from steel and concrete, and Wi-Fi does not travel through those materials,” Kimura added.
According to Yardi Matrix data, the cities encapsulating the largest concentration of multifamily conversions since the start of the decade are history-rich Philadelphia, Washington, D.C. and Cleveland, Ohio.
“In many cities such as Cleveland, there are early 20th century industrial and warehouse buildings that need a new purpose to contribute to the community and to prevent demolition,” said Brooker.
Market demand in urban settings, combined with competitive tax abatements and grants, make these projects viable. In just 30 years, Cleveland has motivated developers to transform a majority of the city’s historic structures through the City of Cleveland’s Residential Tax Abatement program in combination with other incentive programs. There have been more recent developments that converted or are in the process of converting mid-century offices into multifamily. Two examples of this are 55 Public Square and 45 Erieview.
Vocon transformed the Julius Spang Baking Company building, a family-owned bakery from the late 1800s, into BVQ Lofts, a 69-unit residential project at 2801 Barber Ave. in the heart of Cleveland. They retained original glazed brick and patented baking-facility floor tiles that pay homage to the historically industrial setting. The team took energy conservation measures, such as upgrading the building envelope and installing a high-efficiency HVAC system.
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Earlier this month, Repvblik, a developer focusing on hospitality to workforce housing conversions across the country, purchased two existing Motel 6 properties in Reno, Nev. The firm plans to fully renovate and repurpose both assets into a total of 239 affordable studio housing units ready for occupancy in 2023.
Other recent projects handled by Repvblik include the adaptive reuse of an existing hotel, banquet center and waterpark in Sterling Heights, Mich., into 213 apartments; a privately funded project to create 150 quality workforce housing units from a shuttered Ramada Inn property in Sheffield, Ala.; and the multifamily conversion of a former Days Inn property in Branson, Mo., to the largest affordable, workforce-targeted housing project in the U.S.
After the Great Recession of 2008-09, multifamily properties were so affordable that conversions were of no interest. Today, as the cost to develop multifamily properties has dramatically increased, the property acquired 10 years ago is maybe worth three times the cost of what it takes to purchase or build today. This being said, Kimura doesn’t see multifamily conversions as a trend, but rather as an investment opportunity or strategy depending on the current cycle and shifts in the market.
“Right now, we are experiencing an inflated market with a previously low-interest rate environment and a ton of equity that could buy real estate. I think conversions will continue depending on market factors, rent prices and the price of single-family homes,” he concluded.