Adaptive Reuse Puts Property Managers to the Test

It seems you can’t go a day without seeing headlines about the creative ways in which an obsolete space is getting a new life through adaptive reuse. These kinds of projects can vary tremendously, and every case must be treated appropriately to reflect the unique qualities of the existing building and the goals of the redevelopment.

A CPM (certified property manager) will likely be entrusted with the management of this complex asset. There are essentially three aspects of property management unique to adaptive reuse that may not be fully appreciated.

1. Use combinations and points of friction: Most adaptive reuse properties involve more than one use. Not all uses play well together, and management can be challenging. For example, multifamily and hotel uses are not complementary. Multifamily residences tend to be unable to absorb their pro rata share of common area and concierge services from an adjoining hotel use. Friction and litigation are common between the homeowners’ association and the hotel operating entity and its agreement. However, office and hotel uses are accretive.
   
   Before agreeing to manage a mixed-use adaptive reuse, understand the friction points that can result between uses. Parking and allocation of common-area expenses are typically the two areas most contested.
2. Tenant leasing and retention: Tenants that opt to occupy an adaptive reuse property generally have two common characteristics. First, they tend to be younger companies that want something different than a generic office building, and they often lack the creditworthiness and time in business to satisfy permanent lending requirements. Large credit tenants are much more likely to stay in traditional and institutionally owned buildings for a variety of liability and security reasons. So chances are good your leasing success will come from a smaller, less credit¬worthy tenant.
   
   Second, adaptive reuse tenants tend not to move when their lease expires because they invest more in tenant improvements. That translates to higher tenant retention ratios. In my experience, the average tenant retention ratio in adaptive reuse projects tends to exceed 85%, regardless of use—office, retail, or residential. 
3. Added complexity: Make sure you get paid properly to manage a more complex property. Despite the fact that the mechanical systems in most adaptive reuse projects have been recently updated, they are hybrid in nature and are often made to specifically fit a particular reuse. Maintaining systems requires knowing who designed them and where parts can be sourced. But perhaps it’s more import¬ant to have a Plan B for restoring a system if it goes down and takes days to repair.
   
   Allocation of common-area expense among users will be a perennial challenge, requiring time to explain and document the fairness of the allocations. Leasing approvals will take longer because you will likely be dealing with a startup company or smaller business with less credit.

Managing adaptive reuse properties is more complex than managing most other properties. Don’t underestimate the cost of doing the job right. To property owners and investors, my advice is to not go cheap when hiring property management firms any more than you would when working with engineering firms in the upfront decision to undertake an adaptive reuse project.

Adapted from the article “Art of Adaptation” published in the February 2021 issue of the Journal of Property Management.