Repurposing Commercial Real Estate
An empty office building doesn’t have to remain an office building — and an old supermarket doesn’t have to continue to house groceries. As the needs of communities evolve, the way people use older buildings can also evolve. Repurposing commercial real estate gives you the opportunity to revitalize an older building and breathe new life into a neighborhood or town.
Revitalizing commercial real estate can have many benefits for the area around it. Although the definition of abandoned property varies from state to state, it has a similar effect across the U.S. For example, buildings within a certain distance of abandoned property are likely to see a decrease in value. In some cases, buildings within 250 to 1,500 feet of an abandoned property can have their values negatively affected by the presence of the vacant real estate.
Abandoned and unused buildings also have an adverse effect on quality of life for people in the area. In Pittsburg, for example, crime tends to be 15 percent higher within 250 feet of a vacant property. Empty and unused buildings also cost cities money that could be better spent on other things. Philadelphia spends more than $20 million each year maintaining vacant buildings, for example.
One solution to the abandoned building problem is to transform former office buildings, warehouses and stores into in-demand properties. Repurposing commercial real estate is a good idea for cities that have plenty of empty buildings and a high demand for housing. It can also be a cost-effective move for developers and others in the commercial real estate sector. It often costs less to repurpose an existing structure than to build a new one.
Finding Property to Repurpose for Your Needs
Whether you’re transforming an unused warehouse or a vacant office building into a residential property or mixed-use building, there are a few things to keep in mind. You may need to get the support of area community members and residents before you purchase the property and make any changes.
Depending on the age of the building and its zoning, you might need to spend some time and money to change the zoning or making sure your project meets historical code requirements. Pre-Due Diligence can help you quickly understand the amount of time and effort that may be required to make your project a reality.
Zoning and Ordinance Considerations
Zoning determines what can be developed and dictates the acceptable uses for a property. A city or municipality usually creates a zoning plan to direct what how development will occur. For example, buildings zoned for industrial purposes are often located in the same general area, while residential buildings are usually situated near each other.
Although specific zoning categories might vary by municipality, there are several broad categories:
- Commercial. Within the commercial zoning category, there are many subcategories determined by the use of the property and the businesses located in it. Office buildings, hotels, nightclubs, restaurants, shopping malls and some apartment buildings are usually zoned as commercial.
- Industrial. Industrial zoning is similar to commercial zoning in that it has several distinct subcategories. Considerations that inform zoning include noise, pollution and how close the building can be to other properties. Industrial zones usually also have higher setback requirements, meaning the buildings need to be a certain distance away from the road or property line.
- Residential. Buildings zoned for residential use include any type of property where people live, including single-family residences, duplexes, co-ops, condos, apartments and trailer parks. Zoning determines how many separate buildings are allowed and whether a manufactured home can be located on the property. Residential zoning laws have a say over which animals can live on the property. For example, it’s usually against the law to keep cows or chickens on a residential property, but cats or dogs are okay.
- Agricultural. You won’t likely find many properties zoned for agricultural use in a developed city. Agricultural zoning is usually used to limit the number of non-farm properties in a primarily agricultural area.
- Combination. Combination zoning is any type of zoning that combines two categories into one. You might find buildings that are zoned for both commercial purposes and residential, for example.
- Historic. In some cases, older buildings might have a historic zoning or be on the National Register of Historic Places, which affects what you can do to the property. Historical buildings often come with a tax credit or incentive to encourage owners to rehabilitate them.
If you intend to renovate or repurpose an existing property for a use that’s not consistent with its current zoning, you’ll most likely need to apply for a change of zoning or zoning approval. You might also be able to request a zoning variance, which would let you use the property in a way not currently specified by the zoning, without changing the zoning itself.
The process for changing zoning is likely to vary slightly from area to area. You will usually need to complete an application and pay a fee. A hearing is typically part of the process. During the hearing, residents and business owners can express their opinions and argue for or against changing the zoning.
Historical Code Considerations
Buildings of a certain age — usually at least 50 years old — might end up on the National Register of Historic Places. The register seeks to protect and preserve historic and archeological resources in the U.S.
If your building is on the National Register or is otherwise considered a historic property, you are limited in some ways when it comes to renovating it. But working with a historical property can open the door to some opportunities for you.
For example, properties on the National Register often qualify for federal tax credits and grants for their rehabilitation and preservation. State tax incentives and grants might also be available.
You can do what you want to the historic property so long as you aren’t taking any money from the federal government and as long as your state doesn’t have specific rules or regulations concerning the preservation of the building. It’s a good idea to review the laws in your state before you start any projects. You may need to preserve the exterior of the building and limit your changes to the interior.
Location and Size
The property’s size and location will both factor into the success of your repurposing project. In real estate, few things matter more than location. You might be able to get a good deal on a property in an out-of-the-way neighborhood or an underused section of a city. But that might not be the best option for you.
For example, if you transform a warehouse in an industrial part of a town into apartments, but there are few amenities in that area, you might struggle to find tenants. On the other hand, if you transform a warehouse in a worn-out and neglected area into a mixed-use property complete with restaurants, cafes, a supermarket and housing, you’re much more likely to attract people.
Size also matters. Some industrial properties are huge, which might make them prohibitively expensive for the average developer or small business to manage. The larger the property is, the more it will cost to purchase, renovate and maintain.
Tips for Revitalizing Commercial Real Estate
Once you’ve found a commercial property you think is ideal for renovating, how do you decide what to use it for and how to do you prepare it for that use? There are some things to consider when repurposing commercial real estate — including playing to the strength of the building and its amenities and dealing with the inevitable setbacks and delays.
One way to determine how you’ll repurpose a building is to examine the surrounding area carefully. If you intend to renovate a shuttered school in a residential area, one option might be to transform at least part of the school into condos or apartments. You might also include retail shops and restaurants in the building to make it more appealing to potential tenants.
Paying attention to the structure of the building and its needs will help plan a renovation project:
- Play to the Building’s Strengths. Older buildings have lots of architectural details and features you just won’t find in newer construction. Those details are usually the things tenants desire. For example, if your building has lots of old wood and exposed beams in the ceilings, keeping those intact will be a selling point with tenants. The same goes for high ceilings, large windows and pressed-in ceilings and molding.
- Natural Light Considerations. Most people enjoy working and living in environments that provide abundant natural light. The great thing about older warehouses is that they often have large windows that let in plenty of sunlight. Some buildings, such as older office buildings and schools, might not have enough natural light or might have interior areas with no windows at all. If that’s the case, you might need to rethink how you’ll upcycle the building. It might be better suited for a different purpose or you might want to pass on it entirely.
- HVAC, Plumbing, Electrical and Tech Updates. Although repurposing an older building is often less expensive than building a new one from scratch, there are cases when the required updates add to the cost significantly. If a building lacks adequate plumbing, cable, internet connections or electricity, it might cost you a pretty penny to update it. Along with a plan for installing any necessary electrical, HVAC, plumbing or other tech connections, you need to have a plan to keep them up-to-date and functional.
Finances and Loans
Another thing to consider when planning a makeover for an existing property is how you’ll finance the renovation. Although you might be able to cover the cost of renovating the property out of pocket, taking out a loan for renovations or updates might help you manage your cash flow better.
Commercial real estate loans are available in a variety of configurations. If you already own the property, you might decide to apply for a construction or renovation loan to cover the cost of the project.
If you don’t yet own the property, a commercial mortgage — with additional funds to cover the cost of the renovation — might be the way to go. Whether a mortgage is the right option will depend on how much you have to put down and your credit history or financials. Depending on the size of your down payment or your credit history, you might not qualify for a loan big enough to cover the acquisition cost and the renovation cost.
Another loan option that might be right for you is a commercial bridge loan. Usually, commercial bridge loans are reserved for borrowers who have completed similar real estate projects and who have some experience under their belts. The loan is designed to give certain borrowers a leg up in the negotiation and purchasing process. If the seller of the property prefers all-cash buyers, applying for and obtaining a bridge loan can give you the assets you need to compete even if you don’t personally have the cash on hand.
Once you purchase the property, you should be able to refinance the bridge loan into a conventional commercial mortgage. Compared to your typical mortgage, the terms for bridge loans are very short — often less than one year. The interest rates offered on these loans also tend to be considerably higher.
Dealing With Setbacks
When you’re renovating an office or warehouse, something is bound to come up. If there’s one thing you can count on in commercial real estate, it’s that there will be a setback or two. Although you won’t be able to plan for specific delays, having some room in your timeline and budget for unexpected issues lets you roll with the punches.
For example, it’s a good idea to plan on an additional 10 or 20 percent to the expected cost of the project. That way, you won’t be scrambling to make up the difference if there are unexpected costs or delays.
It’s also a good idea to add some time to the timeline. Leave space between your anticipated completion date and the target completion date. If your project ends up taking longer than expected, you won’t need to reschedule grand openings or other events.
Examples of Repurposed Commercial Real Estate
Repurposing commercial real estate isn’t a new concept. In fact, there are great examples all across the country of old buildings given a new lease on life:
- Bok School in South Philadelphia. Bok is a former technical high school located in South Philadelphia. The school closed for good after the 2012-2013 school year and the building sat empty while the school district looked for a buyer. In 2015, a development company purchased the school with the goal of making it into a “creative hub.” One of the first projects to come to Bok was the opening of rooftop bar called Le Bok Fin (after Le Bec Fin, a renowned restaurant in the city). Slowly but surely, new tenants began to fill in the empty classrooms at the school, including a wedding planning company, hair salon and a furniture design company.
- The Pearl in San Antonio, Texas. The Pearl was once one of the largest breweries in Texas. Today, it’s a massive mixed-use community with 13 retailers, residences, a hotel and a farmers’ market. You can still find Pearl beer at the complex, but today it’s brewed in Fort Worth.
- The Cotton Gin Factory in Atlanta. Located in the Atlanta Metro area, the Cotton Gin Factory was built in the 19th century. It’s made up of 12 buildings and sits on 12 acres. Two developers bought the property in 2010 for $8 million and transformed it into an arts hub with performance space and artists’ studios.
- Alehouse Inn in Portsmouth, New Hampshire. The Alehouse is another former brewery that’s been transformed for the 21st century. The hotel is located in the old warehouse for the brewery, which closed in 1917 thanks to Prohibition.
- The Century Building in Pittsburgh. The Century Building is a 12-story, 80,000-square-foot former office space in the Cultural District of Pittsburgh. In 2012, the building was transformed into an apartment complex with 60 units. Twenty-eight of the units were designated as “workforce” units and are now rented by people who earn between 60 and 120 percent of the median income in the city.Developers completed the renovation using a mix of grant money from private organizations like the Richard King Mellon Foundation plus funding from Pittsburgh Cultural Trust and federal low-income tax credits. It received the Jack Kemp Workforce Housing Models of Excellence Award in 2012 for providing housing options that meet the needs of the modern workforce.
- The Arcade in Providence, Rhode Island. The Arcade is one of the country’s oldest indoor shopping malls. Its redevelopment project kept the first floor as a shopping center but transformed the second and third floors in micro-lofts, which are small and energy-efficient living spaces. The first tenants moved into the 48 micro-lofts in 2013 and demand has been high ever since, despite the fact that the lofts don’t include stoves or many of the other amenities people typically look for in a residence.
Search for Your Property on CommercialSearch
How do you plan on repurposing a commercial property? Whether you hope to turn an office space into apartments or a warehouse into artists’ studios, browse the listings at CommercialSearch and find your next real estate project today.