Roughly four months into the COVID-19 pandemic, many commercial real estate tenants are struggling to pay rents. Some have benefited from temporary holds on evictions, but bills have been piling up and smaller business owners are now facing closures.
Richard Rubin, founder & CEO of Repvblik, believes that many empty commercial properties can be converted into affordable housing communities, catering to the skyrocketing need for housing options at the lower end of the spectrum. Rubin is an adaptive-reuse investor focusing on workforce and affordable housing creation across the U.S. In the interview below, he shares details about his business model, and explains the advantages of transforming commercial real estate assets into housing for low-income households without relying on federal funds.
You started off with conversions in South Africa and then deployed the business model in the U.S. How did U.S. market respond to this idea?
Rubin: The market reacted with great skepticism. Affordable housing in the U.S. is most frequently funded and developed with low-income housing tax credits, bond financing and other federal programs. The investment community did not believe—and most still don’t—that any affordable housing can be developed without the aid of these programs. Overcoming this mindset from funders has been a massive challenge.
We also focus on the creation of a price point that is suitable to the workforce housing demographic. This often entails creating efficiency apartments. Most funders are not yet adept at including the funding of efficiency units in their arsenal. Both aforementioned points caused us considerable delays in deploying our business model in the U.S.
How has the health crisis exacerbated this need for affordable and workforce housing?
Rubin: With record unemployment numbers, bankruptcies and adjunct macroeconomic stressors, more folks are moving into properties that cater to those earning 60 percent to 120 percent of an area median income. There are always folks ‘shopping up’ but many are now ‘shopping down,’ from a price point perspective. Also, a premise of our business case is allowing folks to have their own apartment through attractive pricing, as opposed to sharing it with a roommate. So, besides the pandemic offering us real estate at an attractive price point, we are also seeing an insatiable demand within the workforce housing demographic. We expect this demand to continue well into the future.
The COVID-19 pandemic has hit several sectors hard, leaving many commercial properties empty. What do you expect to happen with all the vacant space given the current economic environment?
Rubin: The entire real estate landscape as we know it is changing. Before, folks just ran a model through a matrix—funding, lease-up, refinancing and disposal were pretty formulaic. This is no longer a luxury enjoyed within the real estate community. If one is not innovative and entrepreneurial, there is no place for them within this new normal. Every single real estate asset class will need to be reinvented. If an owner cannot change the use or a property’s tenancy, they will fail going forward. This is going to require not only innovation in thought, but like-minded funders and stakeholders.
We are going to see giant portfolio owners underwater. Adaptive reuse of this space will be the order of the day. We will see wholesale conversion of retail, commercial office, industrial and mall properties into residential, medical, self-storage, fulfillment centers and last-mile products. However, many pockets of real estate will remain vacant for years, as has been the case for a number of disused malls for years now. These businesses have been in trouble for years. Many try to lay the blame on COVID-19, but they were in trouble long before COVID-19 hit.
From an investor’s standpoint, what are the advantages of converting a distressed property into an affordable housing community?
Rubin: Not every distressed real estate asset makes a good conversion into an affordable housing asset. However, there are certain assets—depending on their price, location, services implicit to the site and current use—that make them exceptional candidates for being converted into affordable housing units.
Hotels make very easy conversions to affordable housing. The reason is that they are already configured into some form of residential housing, albeit for historically short-term stays. They consist of basic modules that can be turned into apartments to service a market. They usually have a level of amenities, offer plenty of extra space to convert into other uses and tend to be well-located.
Commercial office space has long been converted into apartments around the world. The building envelope is usually utilized, and the property is deemed to be economically viable. The building substructure, the services, elevators and elevator shafts can be kept, but generally everything else is changed.
Industrial space has also long been converted by early adopters into loft apartments in upcoming nodes. Think of the meatpacking district in New York City or The Docklands in London. Retail is less common, but will be commonplace going forward. With all of these, what makes them attractive to investors is a lower basis, and therein, a lighter lift than ground-up development.
What’s the average length of time needed to convert a distressed office asset into an affordable housing community?
Rubin: This is very dependent on the following conditions: the size of the property; the city in which the redevelopment would occur; if there’s citywide support for the project; if there’s some form of an adaptive-reuse ordinance; access to strong and experienced professionals to work on the project; and access to skilled artisans and contractors.
Let’s take, for example, a 100,000-square-foot commercial office conversion. The entitlement process should take between three and six months. The actual conversion should take between 12 and 18 months to complete, so a developer should allow for at least 24 months—from the time the property closes—to receive their certificate of occupancy.
What challenges do you most frequently encounter when working on adaptive-reuse projects?
Rubin: The usual challenges that one encounters relate to the fact that one is creating apartments out of a building that was never designed, built, entitled or leased-up as a residential building. One is usually just inheriting a building envelope with some services attached. It’s like working on a jigsaw puzzle or composing a piece of music. One has a bunch of seemingly unrelated parts that one needs to make relevant to the end result. The first aspect is figuring out the redundancies and what one can utilize to best create a residential community.
Life safety, code and other technical change-of-use challenges are always part of the equation. Then one has to approach various city departments to make sure they will support the initiative.
Is it hard to find the right financing partners for such projects, considering you do not rely on federal funding?
Rubin: This has probably been the greatest challenge. There’s an insatiable demand for workforce housing in the U.S., and a massive undersupply of affordable housing. LIHTC and other federal programs only cater to a percentage of the demand, and there is a fortune of buildings that can be converted into affordable housing properties. Despite widespread support for the creation of workforce housing in the U.S., this a “square peg in a round hole” type of business. Funders usually put it into the “LIHTC pile” and commercial banks generally fund preservation projects to ratify their workforce housing quota, as this is perceived as lower risk. Funders often think in a “herd mentality” way.
Tell us about your most recent adaptive-reuse project—Plato’s Cave in Branson, Mo.
Rubin: Plato’s Cave was a mothballed 423-key Days Inn hotel. The property had been vacant for 10 years. We bought the property for cash—as no financier would fund it—and converted it into 340 workforce housing apartments. The property is now rich in amenities—and almost complete. Whatever we have completed is fully leased, and we already have a waiting list.
What are your other upcoming projects? Are there any particular markets you are eyeing?
Rubin: We are rolling out adaptive-reuse projects across the U.S. We are currently purchasing around 20 hotels to be converted into workforce housing projects, which should add around 3,000 workforce housing apartments to the market. We hope to add 20,000 workforce housing apartments to the market through adaptive reuse over the next three to five years.