The Case for Office-to-Multifamily Adaptive Reuse

Cost and time reductions in the 15% to 20% range often cited for adaptive reuse.

Apartment-Office building shutterstock_536534305 In general, adaptive reuse for commercial buildings is gaining favor due to its potential for higher returns, cheaper materials costs and being more economical compared to demolitions and having a reduced environmental impact on the area by much less hauling to landfills.

However, the economic factors affecting office-to-multifamily conversions are less straightforward than those associated with life science or medical office conversions, wrote Emil Malizia for NAIOP in a recent report. 

He defined attractive markets for multifamily reuse as those where multifamily vacancies are lower than office vacancies, rent levels are at least comparable, and multifamily rent growth is expected to exceed office rent growth.

Recent trends portend continued strong demand for multifamily rental. Marcus & Millichap reports very strong performance of multifamily in the second quarter of 2021, with record absorption of more than 218,000 units, rent growth over 4% and vacancies down 70 basis points to 3.8%. 

More Advantages than New Construction

In addition to being more environmentally sustainable, adaptive reuse projects realize several advantages over new construction,” Malizia wrote. “Although construction and development contingencies may be larger in anticipation of change orders, overall cost and time reductions in the 15% to 20% range or higher are often cited for adaptive reuse. Less construction time directly translates into lower development period risk. 

“Labor costs constitute a larger share of total project cost for adaptive reuse projects than new construction since these projects use fewer new materials. [Because] the cost of materials has increased more than construction labor, construction costs for adaptive reuse projects have increased less over time than new construction projects.”

He wrote that in some places, older buildings have more market appeal than new construction because they help maintain the uniqueness and authenticity of an area. 

“This public benefit has prompted modest subsidies for adaptive reuse in some jurisdictions,” according to Malizia. “Finally, because the building envelope exists, it is often possible to phase building occupancy as renovations are completed. 

“If inspections can be completed and a certificate of occupancy issued, the renovated floor or part of the building can be occupied. The combination of less time to project completion and cash inflows from partial occupancy during construction have positive impacts on returns.”

Source: GlobeSt.

Join AAOA for Free!

All types of rental property owners welcome