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Finding ways to give new life to old buildings is both a challenge and an opportunity for the commercial real estate industry. Out-of-date and obsolete income properties abound in cities and suburbs across the country. Some properties sit abandoned while others are occupied, but are no longer able to operate efficiently.

These outmoded structures can hold back neighborhood progress and contribute to blight. However, large-scale redevelopment is an expensive and difficult process, and residents are often averse to what they perceive as a wholesale change in the character of their communities.

Innovative developers, often in partnership with property owners, real estate investors and capital sources are taking a novel approach to the problem. They are employing a strategy known as "adaptive reuse" to tackle the problem of outdated buildings.

Adaptive Reuse vs. Traditional Redevelopment

Adaptive reuse is the term used to describe the repurposing and modernization of an out-of-date asset as opposed to effectively replacing the building through redevelopment. The process of adaptive reuse attempts to retain the original footprint of the target building as much as possible. The frame and the facade — which generally reflect the unique charm of older buildings — are also left intact to the greatest extent possible.

In some cases, adaptive reuse gives new purpose to buildings that are designated for preservation by The Secretary of the Interior’s Standards for the Treatment of Historic Properties.1 However, not all historic buildings have to be adapted for reuse, and importantly, a building does not have to be designated as historic for it to be rehabilitated and adapted for reuse.

What distinguishes adaptive reuse from other forms of development (and redevelopment) is that the commercial purpose is changed from one commercial property category to another, while the important physical attributes of the building remain substantially the same. An underused, downtown retail building might be transformed into a multifamily dwelling, while an abandoned factory might become a destination retail center. The guiding principle is to find a higher, better use for uneconomical buildings and to upgrade rather than demolish them.

Benefits to Developers, the Community and the Environment

The benefits of adaptive reuse are multidimensional. There are immediate economic benefits to the developer and investors in the form of profit and appreciation, but significant tangible and intangible value accrues to the overall community as well. The natural environment can also gain by the enhanced sustainability of renovated buildings.

Commercial real estate buildings that have outlived their usefulness can be more of a liability than an asset to the investors who hold onto them. Owners of older, dilapidated buildings appreciate new ideas that inject new value into their aging holdings. Additionally, the lower relative costs associated with adaptive reuse make it an especially attractive option. Demolition of the sort necessary in traditional redevelopment represents a significant expense that must be shouldered before vertical construction can even begin.

Retrofitting older buildings tends to be much less expensive. The frame, the foundation aspects and much of the face of target structures are preserved, which can save builders substantial amounts of money. Resources that might have gone into tearing down an edifice can instead be directed into tangible improvements in amenities and efficiency.

In addition, in some cases, developers may be able to tap into attractive federal tax incentives or public financing options when undertaking an adaptive reuse, such as Opportunity Zone incentives, Historic Tax Credits, Low-Income Housing Tax Credits or New Market Tax Credits.2

Neighborhoods and communities gain by being able to maintain an important sense of continuity and civic pride. When older buildings thrive, generations of residents are able to share and appreciate their common memories of a common landscape.3 Adaptive reuse can help avoid the negative connotations of "gentrification," when a neighborhood is transformed with high-value properties  that push out the existing lower-income residents of an area, while providing a large economic impact in the form of jobs and economic activity.

Another benefit not to be overlooked is the vast improvement in energy efficiency4 that comes with modernizing buildings and replacing inefficient heating and air conditioning infrastructure,which also contributes to the ability to finance these projects.5 Put simply, rehabbing older buildings greatly diminishes their carbon footprint and improves the environment for everyone.

Adaptive Reuse Is Here to Stay

Current dynamics of the commercial real estate industry continue to favor the idea of adaptive reuse, that is retrofitting aging buildings to better, more relevant uses rather than starting from scratch. Builders and developers are eager to take on such projects, banks and investors are very willing to invest in them and the community prefers the stability that comes with a sense of permanence.


To learn more, contact Rob Likes, National Director at Robert_L_Likes@KeyBank.com or 801-297-5811.

1

The Secretary of the Interior “Technical Preservation Services” https://www.nps.gov/tps/standards.htm

2

GlobeSt.com “Investors Layer on Tax Credits for OZ Developments.” 2/27/20 https://www.globest.com/2020/02/27/investors-layer-on-government-tax-credits-for-oz-developments/

3

Construction Dive “How Transformative Philosophies are Driving a Surge in Adaptive Reuse Projects” 12/15/2016 https://www.constructiondive.com/news/how-transformative-philosophies-are-driving-a-surge-in-adaptive-reuse-proje/432392/

4

NRDC.org “Energy Efficient Buildings” https://www.nrdc.org/issues/energy-efficient-buildings

This document is designed to provide general information only and is not comprehensive nor is it legal, accounting, or tax advice. Credit products are subject to credit approval, terms, conditions, and availability and subject to change. Key.com is a federally registered service mark of KeyCorp.

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