Adaptive reuse in commercial real estate is the process of transforming existing buildings or property types into new properties, often to meet increased demand in that sector. Recently, adaptive reuse apartments have gained considerable attention due to the ongoing impact of hybrid work and remote options on the office sector.
Over the past few decades, vacant office buildings have found new life as residential spaces, offering condos and rental apartments, as well as repurposed industrial warehouses. Given the substantial shifts and increasing vacancies in the commercial office sector there are potential opportunities for investors to consider.
Office to Residential
The concept of adaptive reuse, particularly in the context of converting offices into residential spaces, holds a promising future. For instance, numerous conversion projects are set to be completed in the coming years, with Yardi Matrix data projecting a total of 122,000 adaptive reuse apartments in various stages of conversion. This trend underscores the increasing popularity of adaptive reuse across the US. According to data from RentCafe, the growth of adaptive reuse apartments has outpaced that of new apartments, surging by 25 percent over the past two years compared to the period before the pandemic. This surge presents a compelling opportunity for developers to breathe new life into old buildings, particularly in central business districts that boast nearby amenities like restaurants, retail, and robust employment opportunities. Moreover, developers leveraging adaptive reuse contribute significantly to urban revitalization in cities that have grappled with neglect, elevated crime rates, and infrastructural decay. Additionally, the appeal of adaptive reuse goes beyond these advantages, as it encompasses sustainability, efficient use of time, cost savings, and minimizing community displacement.
Office to Industrial
Another dimension of adaptive reuse lies in converting offices into industrial spaces. While the trend of converting offices into residential properties is becoming more common and offers numerous benefits, experts in commercial real estate observe that transforming office buildings into industrial facilities tends to be more cost-effective on a per-square-foot basis. This is due to the additional amenities, different floor plans, and expanded systems required for residential conversions. Conversions to residential uses must incorporate such elements as plumbing for kitchens, sinks, showers and bathrooms, as well as HVAC, thermostats, and windows in individual units.
Much like the trend of office-to-residential conversions, the shift towards converting offices into industrial warehouse spaces is gaining remarkable momentum. Commercial Observer reports a substantial uptick in office building owners repurposing their properties for industrial use. Notably, over the past two years, approximately 15 million square feet of office space have transitioned into industrial facilities, reflecting an astonishing 34 percent increase. A considerable portion of this repurposed space involves new constructions designed for storage, replacing demolished office structures.
This trend is particularly prominent in land and warehouse-constrained markets, where office-to-industrial conversions thrive. While this transformation can potentially occur in various regions, industry leaders like Prologis emphasize the strategic importance of targeting large coastal markets characterized by high land values and limited warehouse space availability.
In this ever-evolving landscape, adaptive reuse is more than a trend—it's a strategic imperative that underscores the industry's capacity to reimagine and reshape spaces to align with new realities. As we look ahead, the strategic coupling of historical preservation, sustainability, and economic growth through adaptive reuse projects promises to redefine the possibilities of commercial real estate, ensuring the legacy of these transformations extends well into the future.