Sustainable shelter

As societal needs change, adaptive reuse projects to repurpose existing buildings or structures are becoming an increasingly crucial strategy for real estate developers. Changing the use of these pre-existing structures can help meet the many evolving community demands while minimizing environmental impact and preserving the original history of spaces and communities.

One space where there’s great potential to utilize adaptive reuse is in the area of housing, particularly affordable housing. The lack of affordable housing in the U.S. has long been an issue. However, as home sales boomed during the COVID-19 pandemic, the supply of affordable rental housing dwindled, as documented in a March 2022 Pew Research Center report on housing affordability. Due in large part to the decreased supply, U.S. renters have seen their rent rise, on average, by 18% over the last five years. People, particularly in urban communities, are no longer able to afford homes in their areas, and many are facing homelessness, according to a July 2023 report on National Public Radio.

There’s clearly a need for more affordable housing. But as production costs have risen, materials have become more expensive and harder to find. And as supply and space have become more limited, real estate professionals have struggled to keep up with demand, according to a May 2022 Forbes story.

Enter adaptive reuse

Professional associations, including IREM and NAIOP, have served as vocal advocates for the federal government to incentivize the adaptive reuse of vacant and underutilized office buildings and other structures. They’re doing this to help address the severe shortage of affordable housing in many communities, and the government has shown signs of doing just that.

A May 23, 2023, letter to Congress signed by IREM, NAIOP, and several other national real estate associations noted that legislation introduced in the last two Congresses would provide a 20% tax credit to convert office buildings into other uses, including residential. The letter urges Congress to modify the legislation so that the tax credit would apply to other types of commercial properties, including shopping centers and hotels.

On Oct. 27, 2023, the White House announced a plan to create more affordable housing by converting commercial properties to residential use. In conjunction with this plan, the U.S. Department of Housing and Urban Development (HUD) released an updated notice on how the Community Development Block Grant Fund (CDBG) can be used to boost housing supply (including via adaptive reuse). The CDBG offers specific incentives to municipalities and developers seeking to use HUD funding to finance adaptive reuse projects. Further, the U.S. General Services Administration is expanding its Good Neighbor Program to promote the sale of surplus federal properties to buyers who want to redevelop them for residential use.

Top benefits of adaptive reuse

One benefit of adaptive reuse projects is the ability to leverage new federal funding opportunities. Other benefits of this technique are compelling. The biggest benefits of adaptive reuse include:

1. Timing. Projects utilizing adaptive reuse can often be completed faster than new developments. A March 2023 article in Commercial Architecture Magazine noted that by using existing infrastructure for a different purpose, these projects inevitably take less time for construction, as developers don’t need to start from the ground up. Further, a May 2022 article in Forbes noted that using a building that already exists typically negates the necessity to obtain new materials, which can be both costly and have long production lead times.
2. Environmental benefit. Adaptive reuse techniques contribute to resource conservation, mitigating environmental impact by favoring the reuse and recycling of existing materials over the extraction, processing, and transportation of new materials. Subsequently, adaptive reuse can significantly reduce construction waste, as the demolition of existing structures is minimized and often eliminated. Additionally, buildings constructed before the widespread integration of climate control features inherently contribute to sustainability through natural means, such as thick walls regulating temperatures, according to Commercial Architecture Magazine.
3. Preserving history. Rather than demolishing older buildings with historical or architectural significance, adaptive reuse allows for the retention of unique features and encourages communities to appreciate the history of older buildings. By reusing some of these older spaces, newer generations get opportunities to engage with and appreciate history. An article on the Authentic website, which focuses on the commercial real estate industry, noted that adaptive reuse is a wonderful way to pay homage to important architects, developers, and designers by embracing their work and repurposing it for our current societal needs.

Additional considerations for adaptive reuse projects

While the benefits of adaptive reuse are clear, several items must be considered when deciding whether adaptive reuse fits the needs of a particular project:

1. Zoning. Zoning restrictions may necessitate time-consuming zoning hearings or permit applications. Inadequate analysis of potential zoning issues on a project’s front end may lead to halts, fines, or costly redesigns. Approval processes for buildings on the National Register of Historic Places or zoned as historic may involve coordination with historical review boards or state or local preservation offices, possibly extending project timelines due to more detailed documentation requirements. Those involved with these types of projects should ensure they understand the zoning process and timeline before beginning a project and build in adequate time for completion.
2. Compliance. Existing structures may have been constructed under older or different building codes, and bringing them up to current standards for a new use can be expensive and time-consuming. Developers should engage an inspector before beginning a project. If it’s particularly costly or time-consuming to bring a particular building up to code, potential variances may be considered, or the building might not be the right candidate for adaptive reuse.
3. Covenants, conditions, and restrictions (CC&Rs). CC&Rs often encumber planned communities or developments and typically restrict land use and property modifications. Adapting structures within the confines of CC&Rs may involve negotiations, legal consultations, or even potential legal disputes. During the due diligence phase, developers should ensure that no particularly onerous CC&Rs impact the planned development.
4. Costs. Adaptive reuse can be more cost-effective than new construction, but developers should be cognizant of the following cost considerations at the outset of an adaptive reuse project:
   • The cost of modifying existing structures to meet the needs of the new use, including changes to walls, floors, ceilings, and support systems
   • Upgrading or installing new heating, ventilation, air conditioning, plumbing, electrical, and other building systems to align with the requirements of the new use and building codes
   • Connecting the property to necessary utilities or upgrading existing connections to meet the demands of the new use
5. Additional environmental considerations. There’s a risk that transforming an existing structure may unearth various environmental challenges, depending on the structure’s age, history, and previous uses. Conducting thorough environmental site assessments and working with environmental consultants can help identify and address these issues early in the planning stages. Some items to look out for are:
   • Previous industrial or commercial activities on the site may have led to soil or groundwater contamination.
   • Materials like asbestos and lead-based paint are often present in older buildings and can pose health risks if disturbed during renovation or demolition.
   • Neglected or abandoned buildings may have issues with mold growth, affecting indoor air quality and occupant health.
   • Brownfield sites may involve addressing historical contamination issues.
   • The site may be near protected habitats or home to endangered species.
   • Changes in land use can impact stormwater runoff patterns, potentially causing erosion and affecting local water quality.
6. Financing. Some lenders may be hesitant to provide funds for an adaptive reuse project because:
   • Assessing the value of an adaptive reuse property can be complex as traditional appraisal methods may not fully capture the potential value post-conversion.
   • The success of an adaptive reuse project often relies on market acceptance and demand for the new use of the property.
   • These projects may lack direct comparables, making it challenging for lenders to accurately assess risk. New governmental funding programs may assist with these difficulties.

There are many reasons that utilizing adaptive reuse might be the right call for your project. The benefit of being able to preserve culturally significant spaces and maintain local history cannot be understated, and with new federal government support and programs, developers may be able to secure additional funding and assistance for these projects. However, it’s always important to analyze a project holistically and in conjunction with counsel at the outset to determine suitability. Our hope is that developers and managers making property use recommendations to owners, will understand these benefits and considerations and proactively consider adaptive reuse in early project planning for a more sustainable future.