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With the U.S. in the midst of a housing crunch—and home affordability at historical lows—both commercial real estate developers and public officials are looking for solutions. Converting underused commercial space into multifamily housing is one potential approach that has many supporters. But successful property conversions must include creative amenities and mixed-use development to support tenants, experts said last week during an Urban Land Institute webinar coinciding with the release of ULI’s report, “Behind the Facade: The Feasibility of Converting Commercial Real Estate to Multifamily.”
Understanding the needs of future tenants is fundamental when converting an office or retail space or hotel property to multifamily, said Mark Rivers, executive vice president and managing director of Washington, D.C.–based investment firm Lowe. Rivers highlighted a recent adaptive reuse project his company completed in Alexandria, Va., in which an office building with an outdoor plaza and a parking garage was converted io multifamily. The intended tenants were older millennials with growing families. The conversion included a 5,000-square-foot dog park, an outdoor play area for children and 10,000 square feet of retail space. “You have to think, ‘Who is my audience? Who is my renter?’” said Rivers. “What can I turn the property into that would be valuable to that person?”
Understanding the strengths and weaknesses of the property undergoing conversion is also essential for success, said Nick Brumback, co-president of commercial development firm Brumback Inc., in Spokane, Wash. Brumback begins every project with a walkthrough of the property to identify potential red flags, including the adequacy of the floor load, the viability of current building systems and space for modern amenities and safety features. Brumback prefers to work with buildings constructed in the 1960s or later because they have properly sized stairwells and space to accommodate new ducting. He advised bringing in top-notch designers at the beginning of every project to help tackle building flaws with creative solutions. “You need nontraditional design professionals,” said Brumback. “Whether you have a typical reuse or a difficult one, you need an out-of-the-box thinker on the engineering side. No two projects are alike.”
Adaptive reuse projects must also win the approval of local government. Areas in and around a central business district, where zoning already allows for housing, tend to be ideal candidates, said Rob Kerns, the city of Alexandria’s development division chief. Many cities offer tax breaks and other incentives for adaptive reuse projects, he said. And like Alexandria, many offer additional incentives for conversions that meet green standards, such as the LEED Silver certification. Kerns also advocated for creativity on the part of developers and city government. “None of these conversions are identical when it comes to parking, the building envelope, the open space,” said Kerns, “and we have to be somewhat creative in interpreting rules sometimes.”
Kerns, who has worked with Rivers on projects in Alexandria, also encouraged developers to look at neighborhoods and mixed-use development: “For workforce housing, it’s important to have a mix—you want parks, food, retail. That’s important for residential.”
While officials in urban areas might be increasingly open to adaptive reuse projects, the suburbs can often be a tougher sell. Government, school boards and residents can be vocal critics, and developers often must contend with NIMBYism. To get a project approved, developers should be armed with patience and research. “We get pushback,” said Rivers. “People worry about traffic. But the fact is residential generates much less traffic than office. And there is concern about overloading schools and public services, but rental housing has a lower average household size than owner-occupied housing.”
Developers can also win over opponents with strong financial projections. Kerns stated that adaptive reuse projects can mean higher tax revenue for local government. “Multifamily often results in better fiscal outcomes—higher assessed value than office,” said Kerns. “It winds up being a real estate winner for us.”