Finding New Life in Old Real Estate
While style trends often draw inspiration from the past, they often need some modernization to adapt to today’s lifestyle needs. The same goes for real estate properties that have been around for decades. Commercial properties developed as part of the post-WWII boom often have environmental issues, incongruent zoning or obsolete structures that do not meet contemporary standards. However, many of these properties are in high-demand urban environments and could be well-positioned to serve the modern-day populace. So, how can we make these aged assets chic again?
Redevelopment of commercial real estate property is booming in many metropolitan areas of the U.S., such as Atlanta, Boston, Chicago, Los Angeles and Washington, D.C. Land prices are surging, and industrial real estate rent prices have increased between 50 to 70% for areas like Greater Los Angeles and Greater Boston in just the last four years, according to data from CoStar Realty Information Inc. These are specific to redeveloped properties within a nine-mile area of the city center. Clearly, adaptive urban re-use is now in fashion.
There are many factors that have made older industrial properties ripe for redevelopment:
- Densification of cities: More and more consumers are now clustered in cities, increasing the demand for housing.
- Transition to e-commerce: Demand for warehouse space in/near these large population centers is growing rapidly.
- Understanding of environmental remediation: Contamination is no longer a showstopper but something that stakeholders can often work through.
The convergence of these factors with other socio economic shifts is fueling the need to relook at vacant facilities and underutilized buildings for opportunities to uncover hidden value by simply redeveloping them.
Traffic congestion, smaller average household size, urban amenities and creative redevelopment have resulted in a new appreciation for some of our oldest cities. Millennials and empty nesters especially are shunning the suburban lifestyle for the more enticing work/live/play environments of cities, pushing demand for apartments and affordable housing. Washington, D.C., alone has added over 10,000 multifamily units in the last 12 months.
At the same time, consumer spending habits are rapidly transitioning from suburban malls and strip shopping centers to the internet and at-home delivery. Amazon and its many competitors are investing billions of dollars in perfecting same-day delivery service to these growing population centers. Vacancy rates for “last-mile” warehouses (defined as less than 200,000 square feet and within nine miles of the population center) in most cities are extremely low. Boston’s vacancy rate for last-mile warehouse is currently 3.7% and rental rates have increased 70% since 2015. Rental rates for warehouses in downtown Chicago have doubled since 2015.
The reauthorization of the Superfund Act in 1986 by the EPA expanded potential environmental liability from the originators of environmental contamination to the current property owners. The act created tremendous risk for developers and their lenders but spurred the growth of environmental consulting, research and development. This body of work has resulted in a much better understanding of environmental risks and lower-cost remediation standards in many instances. State and local governments have adapted to the new standards as well, creating programs to offset these remediation costs and lowering some of their “all-or-nothing” policies to hasten the renewal of blighted areas and to increase their tax base.
Market forces continue to push values higher for most classes of real estate, as environmental regulations for legacy assets continue to moderate. Each market and each property is different. Understanding demand drivers, local development processes and the impact of environmental impairments on commercial real estate property can often transform a generational corporate liability into a real productive asset.
Michael Clark is the senior managing director at Savills, a commercial real estate firm, who focuses on industrial and warehouse tenants with specialty in developing and implementing real estate redevelopment strategy for clients to help them transform a generational corporate liability into a real asset.
