After the Dust Settles on Adaptive Reuse

CHARLOTTE—Charlotte commercial real estate developers have been dipping their toes into the adaptive reuse trend with some success. But when does this strategy work best? And what about the second phase of a successful adaptive reuse project?

GlobeSt.com caught up with Fitzhugh L. Stout, senior managing director for Integra Realty Resources in Charlotte, to get some answers in part two of our exclusive interview. Be sure to go back and read part one, where he discussed what he sees with multifamily interest rates, South Carolina's multifamily development pipeline and how adaptive reuse projects are creating opportunities for developers.

GlobeSt.com: When does the adaptive reuse strategy work?

Stout: The adaptive reuse strategy works best when you are not the pioneering developer; the project qualifies for both local and national historic tax credits; and the development is large enough that, upon completion, it will have an immediate impact on the surrounding neighborhood. However, it is more challenging when the opposite is true, when you are the pioneering developer and the project is in a small portion of a neighborhood that is already in decline.  

The main factors to consider when contemplating adaptive reuse strategies are whether or not the project could be designated on the local and/or national level as a historic landmark, and whether the owners are part of the project. The most successful project I worked on was the conversion of an older four-story mill into approximately 30,000 square feet of office condominiums.

We were able to obtain historic status on the brick and timber mill, which provided a local tax abatement as well as state and federal tax credits totaling 40% of the eligible project costs. We also presold all of the units to owner users prior to completion. The neighborhood was already in transition from industrial to office use and close to uptown Charlotte and a historic inner city neighborhood. All of these factors played positively to the success of that particular project.

GlobeSt.com: Does adaptive reuse tend to work better in some markets than others?

Stout: Adaptive reuse works best in larger, established primary and secondary markets. It does not tend to do as well in tertiary markets. The biggest challenges we face with adaptive reuse projects today are making them financially feasible and obtaining financing.

GlobeSt.com: What about the second phase of a successful adaptive reuse project?

Stout: There is one interesting observation that I have seen on the second phase of a successful adaptive reuse project. After the successful renovation and lease up of a former textile mill, the original developer sold at the top of the market. The first generation of unique shops was drawn to the project because of the lower rents and edgy feel.

However, the only direction for the new owners to improve their returns was to increase the rents, which caused many of the original tenants that made the project appealing to leave. They were replaced with larger regional tenants that slightly changed the appeal of the center.