Adaptive reuse projects present a lot of challenges for real estate developers, but the rewards can be well worth the effort, both for profitability and community engagement. A session at CRE.Converge Virtual 2020 examined three diverse adaptive-reuse projects that include self storage, mixed-use and the rapidly growing industry of youth sports tourism.
475 Walnut Avenue, Norwood, New Jersey
Mike Kennedy, vice president of real estate at Bret Russell, Inc., shared a conversion of a single-story former manufacturing facility in Norwood, New Jersey, into a two-story self-storage center.
“It was a white albatross that the town wanted to get rid of,” he said.
The 42,000-square-foot building, which was constructed in 1971, presented several challenges for the developers.
First, the property was in foreclosure, so lender approval was needed before work could begin. Next were the environmental issues: Two septic tanks were discovered during demolition, which brought work to a halt and required a visit from state inspectors. Kennedy said the biggest tank, at 5,700 gallons, did not appear on any property records and cost about $35,000 to remove. Asbestos was found on the roof, but that could be covered over and didn’t require removal. A 400-foot-deep water well was also discovered at the rear of the building.
Kennedy said Bret Russell, Inc., sought six variances with the local Zoning Board of Adjustment for the project. The biggest was for parking. The local board required 150 spots, but Kennedy said the project only needed nine. “People park and leave quickly at storage facilities,” he said. The board approved all the variances in August 2018.
The developers raised the roof to create a two-story facility from a one-story building. Kennedy said the process took a month of site preparation but was completed in a day.
When all the work wraps up at the end of 2020, a 121,000-square-foot building will sit on the property.
In the end, Bret Russell, Inc., spent $13.2 million on the project. That includes $320,000 on the roof raising, which significantly increased the net rentable space.
Kennedy said developers looking at potential adaptive-reuse projects should consider increasing the construction contingency by 10% to cover unforeseen problems. Along those same lines, he said it’s important to factor in time for delays. Finally, he urged developers to use experienced vendors with a proven track record of success in adaptive-reuse work.
Hahne & Company Department Store, Newark, New Jersey
Jason Chmura, a senior associate with KSS Architects, discussed the Hahne & Company mixed-use development, which involved the adaptive reuse of a long-shuttered department store. The Art Deco building was constructed in 1901 in downtown Newark and closed in 1986, a casualty of the shift to suburban malls.
“It had been vacant for a very long time,” Chmura said.
Prudential Financial, Inc., L+M Development Partners and The Goldman Sachs Group, in partnership with Citi Community Capital, provided financing for the project. The 400,000-square-foot building opened in 2017. It features an arts and cultural center operated by Rutgers University, 160 residential units and roughly 75,000 square feet of new retail, including a Whole Foods. A coworking space is on the second floor.
“It was one of our most successful experiences of a diverse mixed- use project,” Chmura said.
The $174 million renovation was largely financed through public-private partnerships, but historic tax credits played a major role as well. The Federal Historic Tax Credit program, which is administered by the National Parks Service, gives a 20% federal tax credit to property owners who rehabilitate a historic commercial building for income-producing purposes.
“They have stringent requirements on what you can do in a building,” Chmura said.
In addition to historical tax credits, the project received grants and tax credits for low-income housing.
“The best description I heard was it is not a replicable model,” Chmura said. “There were far too many people involved.”
To maximize light in the second-floor coworking space, the architects used a translucent wall system.
“Department stores were not built for natural light,” Chmura said.
“The original proposal was to use clear glass, but the vendors came back with this plastic material,” Chmura said. “It’s directly fastened to metal studs with no additional trim.”
Chmura said other tenants insisted on maintaining an industrial feel by preserving the visible ductwork in the ceiling, creating spaces with a lot of character.
POWERplex STL, St. Louis, Missouri
Dan Buck, managing partner at Big Sports Properties, shared his POWERplex STL project. It will involve the conversion of the former St. Louis Outlet Mall in Hazelwood, Missouri, into a huge mixed-use retail and sports property. The 1.5 million-square-foot mall opened in 2003 with eight anchor stores and more than 200 specialty shops. It closed in 2019.
Buck said construction on the 160-acre site could begin in about six weeks, adding that the public-private partnership had faced “a lot of challenges, though with COVID it’s a borderline miracle.”
The $60 million project aims to add a major cog to the burgeoning youth sports tourism industry, which Buck says is worth $20 billion and is the fastest-growing segment of the U.S. tourism market.
“Youth sports is year-round,” he said. “Families spend a lot of money traveling to their children’s’ sports events.”
A June 2019 article in St. Louis Magazine described POWERplex STL:
“The space will include nine beach volleyball courts—six of those indoors—22 regular volleyball courts; 10 pickleball courts (which will be rain forest-themed); three full-size NCAA basketball courts with five three-on-three courts; eight turf fields, three of which are indoor underneath a 120-foot-tall dome and the [sic] another inside a 2,200-seat stadium. The team is planning a second phase in 2021, Buck says, which will include a large dance and cheer competition zone along with 20 team dorm rooms that will have more than 400 beds.”
The development will also feature 13 restaurants, a multiplex movie theater, hotels and more than a dozen sports-focused retail stores. It could draw up to 2.9 million visitors a year.
Buck said developments like POWERplex can fill a crucial need in communities that have lost a shopping mall. A January 2020 report from CNBC said a third of all malls in the U.S. could close by 2021.
“The remarkable part about an empty mall is you can get in at an affordable price and you can turn a community liability into an asset,” he said.
Finally, Buck said the POWERplex business model has great income potential and could generate a lot of tax revenue for St. Louis.
“Unlike a lot of retail or office, this industry attracts a lot of sponsorship interest and naming rights,” he said. “They want to get their brands in front of this audience.”