Recent data suggests that America has close to 1 billion square feet of vacant commercial real estate. A staggering figure.
Even the most optimistic forecasts acknowledge that overall demand for office space may never increase to levels that will meaningfully reduce these unprecedented vacancy rates. Therefore, for office properties“ whose time has passed,” the repurposing or adaptive reuse of that real estate is “at times” the best option to salvage some value.
SPD has been asked to either advise on or coordinate the adaptive reuse of over 100 properties across the country in recent years, and the requests continue to accelerate. Our assignments come from both existing owners who want to evaluate their options as well as new and potential owners who are entering this arena with fresh capital and a new business plan.
As you know, not all existing office buildings can easily be converted to another use. In fact, we have seen many examples where either cost or architectural considerations of conversion suggest that a full demolition and replacement of a building is a more viable long-term business plan. For both buyers and sellers, there are several questions that need to be answered when choosing a path forward.
The top five are as follows:
1) From a demand perspective, what are the best uses that local market data suggests for the property?
2) Does local zoning allow for these uses, and if not, what are the prospects for a modification to these regulations?
3) What uses within that data set can be accommodated within the existing building for the lowest capital expense?
4) If instead, the building is demolished and a brand-new structure is built that is tailored to the new business plan, what is both the cost and revenue potential of that scenario versus the renovation?
5) How long is my chosen option going to take to produce revenue?
In the end, the answers to the questions above could lead a current or new owner to conclude that, while not pleasant, the best alternative is to keep the use as is and just lower the financial outlook for the property, by forecasting lower occupancy rates over the long term. The general consensus is that only about 20% of the excess commercial inventory in major cities is reasonably adaptable to an alternative use.
No easy choices these days.
We will keep you posted as the situation continues to evolve.
