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Building Portfolio Value by Repurposing Underperforming Assets

Regardless of the industry, businesses come and go. Some succeed and some fail, and for those that can’t stand the test of time, their legacy is often fleeting. Once the employees are let go and the equipment auctioned off, who remembers any but the biggest private enterprises?

Real estate is much different. A failed apartment building, shopping center or office often dies a slow death, as owners scramble to cut costs or work out tough debt obligations. And even when things take a turn for the worse, when properties are foreclosed on or sold at a loss, the buildings remain frozen in place, unable to move or sink back into the ground. The real estate holdings of owner-occupied properties stay long after the name on the side of the building is removed.

This is why adaptive reuse is an outcome that eventually befalls so many properties. If an investment property does not match the needs of the market, both macro-level and local, its owners, or the investors who come in and buy it at a discount, have the opportunity to transform the building to more accurately reflect the needs of the community. If entrepreneurship is all about creative destruction, there may be no better example than the repurposing of obsolete spaces.

As common as adaptive reuse is, though, both in the news and in your local downtown, it is less common compared to traditional ground-up development or simply adding value to a property while retaining its original use. In this report, we aim to change that. First, we’ll discuss the motives for repurposing and trends in the area before exploring the two main types of adaptive reuse projects underway today as well as several case studies in property repositioning. Finally, we conclude with a list of recommendations on how to identify prime adaptive reuse property candidates yourself.

The Scope of Repurposing

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Today, spaces are being repurposed into all uses: residential, retail, office, industrial and institutional. Similarly, a wide range of properties are being used as the canvas for these projects, although retail and industrial spaces are common choices. Both types of properties have often become obsolete in one way or another, increasing their vacancy rates and making them easier to acquire. As of 2019, over 30 percent of US warehouses were at least 50 years old. As logistics needs have changed, many of these spaces have become less efficient to operate in.

It would be a fair question to ask why, if adaptive reuse is so compelling, do the existing property owners not just do the work themselves? The reality is that adaptive reuse is not an easy proposition. Being able to take an old building, with blueprints that may or may not be intact and legible, and craft it into an entirely new use is not for the faint of heart. Furthermore, it requires a real impetus, not just the simple capacity. Consider the reality that many thousands of small apartment properties go without receiving even cosmetic upgrades for years and years, leaving vast amounts of rent dollars on the table. Turning a warehouse into an office is much more difficult than simply repainting and replacing appliances.

At the end of 2017, the top five industrial landlords owned over 1.7 billion square feet of industrial space. The next 70 biggest landlords owned around 100,000 less square feet of space.

Just as the gulf in sophistication, funding needs and competition between single-family residential and commercial investing keeps many potential investors out of the market, so too do the difficulties of adaptive reuse. At the end of 2017, the top five industrial landlords owned over 1.7 billion square feet of industrial space. The next 70 biggest landlords owned around 100,000 less square feet of space. These big landlords have developed deep expertise in the investment and management of industrial properties, and for many, acquisition activity has only increased in volume. For example, in a single deal, Blackstone picked up 179 million square feet of industrial space in 2019. A one-off redevelopment of a small warehouse into apartments might not be an efficient use of company time.

Despite those difficulties, in absolute terms, there is a huge amount of repurposing activity going on today. By aggregating a large number of known adaptive reuse projects in the context of their total market size, the CCIM Institute found that, as of Q3 2018, between 1 percent and 2 percent of commercial space was adaptive reuse space. In addition, the researchers estimated a growth of up to 4 percent over the following five years. This may not sound like a lot, but 2 percent of the total U.S. commercial inventory, over 32 billion square feet, equals 646 million square feet of adaptive reuse space across the country.

Why Repurpose

It’s important to define the types of repurposing we’re addressing in this report. The term adaptive reuse is often used, and is widely applicable, but for some audiences adaptive reuse implies an element of architectural conservation or historical preservation that may or may not be the case. For the purposes of this report, we are discussing real estate projects that take an existing building with an in-place function, such as a warehouse, office or hotel, whether or not it is currently in service, and modifying it to serve a different type of use. As we will discuss later, the actual amount of work this involves may vary. The main distinguishing factor here is that adaptive reuse is not about properties being redeveloped into a more advanced form of their existing purpose, such as the kind often implemented by apartment investors around the country. There are consequently several motivations for this type of redevelopment activity.

Pursuit of highest and best use

First and foremost is the desire to reconcile outdated uses with a modern market-informed understanding of highest and best use. This requires the property’s new use to meet four hurdles:

  • Physically possible
  • Financially feasible
  • Legally permissible
  • Maximally productive

That last item, maximally productive, is the one that separates a highest and best use from simply an attainable one. A maximally productive property is one that delivers the best returns to the investor.


In addition, there are also drivers on the supply side for real estate repurposing projects. Many markets are filled with older buildings. At the same time, land is increasingly scarce in attractive investment markets, as well as within the neighborhoods that fit investment across all types of urban markets. Regardless of the type of property, this can be a big benefit to development. According to D2 Architecture principal David Dillard, “Necessity and demand for senior living forces developers to be creative, especially with the economies of building and a lack of land over the past 5-10 years. Adaptive reuse has the capacity to put the right community in the right place.” But even in places where land may not be truly scarce, scarcity may still be felt by developers.

Repurposing buildings, like this church, can keep heritage alive in a community | Felipe Tofani, Flickr

Many of the theories that underpin modern American urban planning, like smart growth and new urbanism, take as a primary goal eliminating or reducing sprawl, particularly around downtown areas. This has plenty of community positives, but can make locating the right site for investment tougher through zoning mechanisms. In many cases, pre-existing older buildings have the opportunity to sidestep those headaches since by definition, communities have already adapted to them.

For some uses, vacant or underperforming buildings are well-positioned to be easily transitioned into new uses. Big box stores mark one such example, as they possess an array of features that make them prime candidates for transformation. Here are some of the considerations.

  • Volume: typically equipped to handle many visitors
  • Openness: highly configurable, boxlike layout
  • Orientation: efficient design allowing easy circulation and access
  • Lighting: effective lighting with little need for natural light
  • Location: typically in close proximity to busy roads
  • Other factors that also belong on the list are:
  • Housing: typically located near extensive residential space
  • Vehicular access: loading bays to allow trucks easy access
  • Obsolescence: big box stores that have been left behind by eCommerce and the sector leaders will often be available at discounted pricing.

If shipping containers are the favored choice for a variety of easily-replicable tiny home, storage and workshop projects, big box stores are the commercial analogue.

The heritage element

Finally, the element of heritage protection cannot be overstated. While an investment needs to meet all of the categories above in order to be a valid repurposing effort, preservation can add value in its own way. For some properties, retaining design elements can help with property branding, particularly for multifamily properties, or contribute to an attractive look to help lease retail spaces. In other cases, historical preservation tax credits or other incentives can make the “financially feasible” and “maximally productive” points easier to achieve. Of course, not all buildings either warrant preservation or qualify for incentives.

Community benefits

Repurposing space offers a host of community benefits, as well. Replacing blighted spaces with functioning, attractive properties, particularly when they include some element of heritage conservation, can be very attractive to local communities. There are financial benefits, too. Not only things like increased tax revenue that might be harder to feel at an individual level, but also concrete, measurable areas like property values. While home foreclosures have between a 0.9 percent and 8.7 percent impact on surrounding property values, a vacant property within 500 feet decreases home sales prices by 1.7 to 2.1 percent depending on the level of poverty in the area. Worse still, these impacts are accretionary, growing over time. That is for homes; the impact of vacant offices, stores and industrial space would seem to be much greater. In this way, adaptive reuse has a positive impact on local property values.

Every million dollars spent on property rehabilitation creates between five and nine more construction jobs and over four and a half more community jobs than the same expenditure on new construction.

Job creation represents a significant category of benefit as well. Redeveloping a property is generally more labor intensive than building a new one on a cost percentage basis to the tune of 60 to 70 percent of total project costs for redevelopment vs 50 percent for new construction. In addition, urban planning research indicates that every million dollars spent on property rehabilitation creates between five and nine more construction jobs and over four and a half more community jobs than the same expenditure on new construction.

Over time, these benefits will likely come full circle to reward the project itself. Turning a blighted property into a local hotspot is inherently much better for the market than building a new property next to the blighted site. Similarly, adding an element of heritage to an area can jump-start the development of a local culture in areas that might otherwise seem very transitional. This type of impact not only impacts the financial performance of the property directly, by increasing leasing speed and attainable rents, but also the long-term performance of tenant businesses, particularly in retail and office scenarios.


Depending on the specifics of the situation, repurposing an existing building can be cheaper, when properly managed, than ground-up construction. According to MGAC, a construction consulting firm, the typical larger Mid-Atlantic office new build project will cost between $250 and $300 per square foot, while a historic adaptive reuse project will slightly drop that to $225 to $300. The difference is more notable for institutional property types, where for instance a new construction higher education classroom will cost between $425 and $550 per square foot while the typical historical adaptive reuse higher ed classroom will run only $325 to $475 per square foot.

At the same time, quickly getting a good sense of what demolition costs would amount to can make or break a repurposing project. For some, such as warehouses, and big box stores, demolition costs may be quite limited. But for factories, offices and other buildings with largely occupied floor plates, things can become much more expensive very quickly.

Environmental factors

Repurposing existing properties has a range of environmental benefits that may make it attractive both to investors and communities. Adapting existing structures typically produces less greenhouse gases than new construction, not only by reusing existing materials, each of which has an embodied carbon cost, but also by being able to upgrade insulation and other energy efficiency improvements. Approximately 11 percent of global CO2 emissions come from core and shell building construction, providing a substantial inherent chance to slash carbon emissions through property repurposing.

There is also an environmental gain by reducing the waste produced by the alternative to repurposing, which is demolition. Research indicates that demolition is responsible for 48 percent of solid waste generation during a building’s life cycle, not an insignificant amount when considered against the total 646 million square feet of reused space across the country. Finally, reuse projects often mitigate environmental and health risks, like lead paint and asbestos.


Repurposing older spaces come with a variety of risks that are unique from traditional ground-up or renovation work. For one thing, while costs can be lower, they can also wind up being higher if the project is poorly planned. We already addressed that labor costs tend to take up more of the total project budget than in traditional projects. While the coronavirus outbreak has massively increased unemployment, before the outbreak hit (and ostensibly after we recover from it), the construction labor shortage was a critical development concern. In a survey held last year, 83 percent of contractors had a hard time filling some of their hourly roles in the west and southern U.S. The figure was 81 percent in the midwest and 75 percent in the northeastern U.S.

The percent of contractors who had a hard time filling hourly jobs last year


Western and south U.S.


Midwestern U.S.


Northeastern U.S.

Another group of risk factors are higher construction costs due to the abatement of health hazards, which GMAC estimates at between $2.50 to $6.50 per square foot. There are also environmental hazards to consider based on the past use of the property. In many cases, even if there are few or no hazards to abate, materials can cost more, since they will often have to be custom-ordered to match the dimensions and aesthetics of the older building. As a related point, quickly getting a good sense of what demolition costs would amount to can make or break a repurposing project. For some, such as warehouses, and big box stores, demolition costs may be quite limited. But for factories, offices and other buildings with largely occupied floor plates, things can become much more expensive very quickly. As a final construction note, every project will be different in terms of what is needed to bring the premises up to compliance with modern code and related standards. ADA compliance, upgrading (or completely installing) electrical or plumbing systems, and determining how or even where to install lighting can all quickly inflate project costs.

Repurposing-friendly financing sources

Mortgage REITs
Debt funds
Other alternative lenders

Other risks are less physical. Regardless of whether a property is being funded through incentives, historical structures often come with local oversight attached. This may not be an issue in a repurposing of a mall from 1995, but for older properties, the risk is there. In addition, actually getting these projects funded can be more challenging than traditional property deals, since there are often greater, less traditional risks involved. According to Will James, Northmarq’s Vice President of Debt and Equity Production, some of the best lenders for these projects are non-recourse players such as mortgage REITs and debt funds. Alternative lenders, James said, are often more flexible in their ability to structure deals than typical lenders. Other non-traditional funding sources, like crowdfunding, can also be successful. While there is little data to conclusively prove it, the fact that repurposing projects often have a strongly brandable heritage element might make them stand out over other projects on crowdfunding platforms. This approach worked for a large office property in Chicago that is currently being redeveloped into a hotel space.

Beyond funding, communities may not buy in to adaptation projects in the first place. While the idea of replacing a blighted building with one that includes the property’s heritage while introducing a new use to the mix seems attractive, things are not always so easy. According to Charles Warren, PhD, founding partner of CityStream Solutions, a planning consulting firm, even if you find a good opportunity, “you have to take that to the city council or the constituents around the site. If a distribution center only creates 10 or 12 jobs per 100 square feet, they’re going to look at it as something that will increase truck traffic and pollution around their homes, not provide a high paying job, and not do anything about housing affordability.” For this reason, it can be very beneficial to keep an ear to the ground on community consensus and needs, lest resources be dumped into a project doomed from the onset.

“If a distribution center only creates 10 or 12 jobs per 100 square feet, [some community members are] going to look at it as something that will increase truck traffic and pollution around their homes, not provide a high paying job, and not do anything about housing affordability.”

Charles Warren, PhD, founding
partner of CityStream Solutions

Speaking in broad strokes, the final risk is the high degree of ability and experience that these projects can take. Understanding how to deal with older materials and older construction styles, and make improvements that use new methods, tools and materials, can be very challenging for the inexperienced.

What Makes a Space Obsolete?

Property obsolescence in the real estate business is divided into three general categories with different meanings and different associated opportunities. While property obsoletion seems like an either-or scenario, in truth it makes more sense to view it as a spectrum.

Physical obsolescence

These properties may or may not reflect modern uses and design preferences. However, they’ve been so mismanaged, and accrued so much deferred maintenance, so as to make them less suitable for use or even straight-up repair.
Economic obsolescence

This refers to factors outside the owners control. A retail property rendered obsolete by the development of a bypass highway is a good example of an economically obsolete property.

Functional obsolescence

A property that is functionally obsolete is hamstrung by design, layout or other hard-to-change elements. Perhaps an industrial property is set up for a type of manufacturing that is no longer still in use. This property would be considered functionally obsolete.

It is important to note that each of these categories represents a continuum, While it might be possible to say that a property becomes obsolete when its use for its intended purpose, whether as an operational space (like a manufacturing plant) or an investment, becomes compromised, each one of these categories could be either minor or severe. Consider the example of a shopping center. A new mall being built nearby may suck up much of the center’s traffic, compromising investor returns but still keeping the property afloat (if on a time limit), or it could so strongly impact the shopping center as to make it immediately worthy of repurposing. In general, properties are repurposed when upgrading, repairing or re-marketing them to succeed in their existing use would be infeasible for one of the reasons described under highest and best use.

Here’s another question: what if a property is being used for a purpose other than its initial intention, in such a way that a new owner could easily use the space for its original purpose? Over 25 percent of retail space is leased by users who aren’t engaged in retail sales, said Gary Ralston, managing partner for Coldwell Banker Commercial Saunders Ralston Dantzler Realty. These users could be small businesses or othe r service providers. In the future, Ralston expects “up to 50 percent of retail space to be occupied by users who are not specifically retail users.” These spaces though not necessarily obsolete may still benefit from repurposing.

As readers may guess, the category of economic obsolescence is huge and represents a major portion of what modern repurposing projects respond to. American retail is drastically oversupplied compared to other industrialized countries, with 24.5 square feet of retail space per capita compared to the European average of 4.5 square feet per capita as of late 2019. This is both a cause for and in spite of an ongoing wave of retail closures sweeping the country. Retail oversupply is not directly in the hands of the property owners themselves, making this a good example of economic obsolescence.

Two Models of Repurposing Space

With our understanding established from the previous sections, we can make some observations on how these projects tend to play out. In most cases, we’ve observed repurposing projects go in two general directions. First, ones that see a project sponsor adapting a space to their own particular use case and specifications, for their own business operations. Second, ones that involve an independent developer repurposing a property as an investment.

Repurposing for existing operations

It is these types of projects that are capturing the majority of the coverage right now: properties that are bought by new owners and retrofitted to meet a need in the owner’s operational structure. Typically, buyers of these properties are big logistics companies or eCommerce companies that need additional warehouse space for their distribution models. The properties they buy are often retail spaces that can no longer compete in the competitive shopping world: malls in oversupplied areas and big box stores. Both of these offer huge parking lots and loading bays that can service delivery trucks, and, as we discussed in our report focusing on warehouses, are often located well to service large residential areas.

According to Pauline Hale, Senior Manager at Altus Group, a real estate software and services company with a strong footprint in the valuation space, “There’s one project in the DFW area where they’ve converted the Six Flags Mall into a GM parts distributor. It is right across the street from their Arlington SUV plant, and it brought 850 jobs to the area.” For other companies involved in selling consumer goods, the location of some of these properties can allow for sites to take returns, as well. Hale pointed to the example of Amazon, which accepts returns in person at Kohl’s stores. While not adaptive reuse, this points to the utility of retail spaces for operators of sophisticated distribution networks.

Repurposing as an investment

The next major type of repurposing is that done as an investment. This is typically performed by a property company with expertise in development or redevelopment, and will involve an older building that has fallen out of use being converted into a more modern, desirable use type of any sort. The classic example of this type of repurposing project would be the conversion of an industrial property into loft apartments or retail space.

The Pearl in San Antonio was a brewery before its conversion to current use | Bypassers, Wikimedia Commons

Selecting Future Repurposing Opportunities

We’ve now addressed much of the repurposing process but the question lingers: how to identify the properties that would make for the best repurposing candidates? Certainly not every underutilized retail space would be a good candidate for adaptation, and not every old industrial building would fit for conversion into loft apartments.

Finding obsolete spaces

The first step is to identify supply. Since every property type can be effectively repurposed, this means understanding where older, vacant or distressed properties are located within your market area. In many cases, industrial spaces will be concentrated within a district. These areas can be prime candidates to be repurposed into attractive mixed use neighborhoods. Consider the example of San Antonio’s Pearl area, which is now a vibrant and dynamic mixed use area with a range of housing, entertainment and restaurant options. In earlier years, the district was a brewery complex.

Use a GIS tool to outline the spread of progressive years of investment activity in your market, and approach owners that are in the path of development.

Another strategy to find candidates properties is to review the retailers that are currently struggling, and then identify either the single-tenant properties that these businesses occupy or the shopping centers and malls that are tenanted by multiple such buildings. Being preemptive with this kind of monitoring can keep astute observers a step ahead of the market, before these properties hit the market.

Some older properties, especially those facing prolonged vacancy, may fly under the radar of listing brokers and property databases. For this reason, it could prove beneficial to either personally tour a given focus market, listing down the addresses of properties that meet eyeball criteria such as rough size and condition, or else to take a virtual tour through Google Streetview. The owners of these properties may require direct outreach.

There are also data-based approaches to uncovering applicable properties for repurposing. Using a Geographical Information Systems (GIS) application, identify the location of ground-up or redevelopment activity in a given market. Determine where investments were made on a year by year basis, and layer each year’s activity with a different outline on the basemap. From there, try to understand where investment activity is pushing towards. With that done, perform research to understand why development is trending that way. Perhaps a particular cluster of development pushed the envelope, or a certain road is acting as a highway for development, or a transit line’s presence is shuttling activity farther out from the core. Finally, begin looking for property opportunities in areas that are a little farther out, but that follow the same development hypothesis: look farther down the transit line, near the next busy intersection, or whatever fits the context.

Identifying the highest and best use

Second comes understanding demand, which in this case is represented by highest and best use. Referring back to the criteria to determine highest and best use, we see that all the feasibility measures are included within this label. Perhaps a given older building could realistically be converted into retail space, but office or residential would prove too costly to pencil. Narrowing down the list of possible project ideas will make the last phase of the decision process that much easier.

As a final step, identifying the maximally productive use can be achieved by reviewing supply and demand. For every use type that a given property could be converted to, a thorough review of the market is in order: lease rates, concessions, vacancies and delivery pipeline. For every additional type of new use considered, the analysis process will become that much more time intensive. While various proprietary databases will offer much of this content, depending on the market, a substantial amount could be available publicly as well.

Adaptive reuse projects, being highly opportunistic, geographically-defined plays, require strong connections with local community members: brokers, lenders, local business representatives, and municipality urban planners, to name some of the most noteworthy. Some of these sources can be tapped to provide these data points. Urban planning and business development representatives will likely have pipeline information, while brokers will be able to provide insight into local leasing and vacancy trends. Local business publications will also often offer insight into delivery pipelines. For residential use cases, lease rates, concessions and vacancies can often be determined by secret shopping local property managers or inferred by reviewing apartment listing sites. For other property types, it may be necessary to consider proprietary sources like CoStar.

Researching local pricing trends from property type to property type can also help inform this decision. In a given area, pricing trends can be considered in conjunction with pipeline expectations. Where is the unfulfilled demand? Where is development fulfilling one need, like office, but undersupplying other property types such as residential?

This residential reuse project, originally an industrial space, included a large vertical expansion. Such an addition would fall under the “Supplementation” category. | Calderoliver, Wikimedia Commons

After determining a new highest and best use, the developer must decide what sort of redevelopment work to engage in. Dafna Fisher-Gewirtzman suggests an intriguing model of architectural interventions for adaptive reuse that we present modified into a real-estate oriented version here.


In this most straightforward of adaptive reuse projects, an empty shell of a building is approached with a similar lens to a traditional office build-out, where finishes and fixtures are exchanged or upgraded to make way for a new use. An example would be an outdated but well-built warehouse that could be relatively easily equipped as an event space or office.


In this type of adaptive reuse project, a space is so encumbered with special architecture or fixtures that substantial work is required to adapt for a new use. This might include removing heavy machinery, mitigating environmental concerns, or redesigning rooms with obsolete dimensions for modern purposes. An example is a foundry building that requires substantial effort to convert into apartments.


These projects are the most intensive to complete. They require the construction of substantial supplemental elements in order to achieve the highest and best use. An example would be a manufacturing plant that, with the addition of a ground-up residential component, becomes a mixed-use district of its own.
Overhaul projects necessarily include build-out work but supplementation projects may or may not include the other levels of work. The only way to determine which approach is the right one is to consider the highest and best use attainable in conjunction with the costs and the developer skill set. A given property could qualify as multiple different project types, but if an investor is skilled with interior work and not ground-up construction, a build-out or overhaul project might be the better idea.

Should repurposing matter to ground-up developers?

Discussing the strengths of repurposing and some examples if it happening prompts a question: should new-build developers consider the future repurposing of their properties after they exit?

In short, yes they should. It’s only relevant, though, in how it might increase the probability that a potentially risky property, like retail or hospitality, can be exited quickly and for an adequate price. In this manner, repurposing represents not a possible play for the developer themself, but rather a way to increase sales price on exit, or at least a risk mitigation strategy for properties currently facing scrutiny from investors.

There are some occasions where this is easier to do than others. For the retail to industrial conversions that are becoming increasingly common, the requirement is simple: big box buildings with high ceilings, good truck access and strong locations in proximity to numerous eCommerce shoppers. The outcome of this could mean that our cities see more big box development in the future, as alternate layouts and smaller stores see their repurposing options limited in comparison.


In this report we have discussed property repositioning projects, from concept and motivation to execution and decision-making strategies. We’ve considered the strengths and risks of these projects, and considered several methods to both find property sites that might be worthy of repurposing, and analyze their potential highest and best use. With no lack of older, obsolete or near-obsolete properties, and trends in gentrification that tend to absorb more and more of once-depressed city neighborhoods over time, this sector of the real estate business will not see any drop in interest any time soon. As desirable neighborhoods creep outward into cheaper areas, and trends in retail continue to emphasize the need for flexible, local-level distribution facilities, the stage is set for a true renaissance of repurposing activity.

Repurposing a property will not always be the right play. There will be plenty of times when a project that would pencil is not supported by the community, or a well-supported project is too dilapidated or polluted to give the desired return, or any number of other negative scenarios. In fact, some properties may simply not be worth repurposing in the first place, whether it is because their location is too poor, their design so unsuitable for modern needs, or otherwise. But despite these challenges and speed bumps, repurposing obsolete spaces will continue to represent a valid option for many thousands of properties, and perhaps hundreds of investors, well into the future. Indeed, there will come a day in the future when it is our modern class B and class A buildings that are being repurposed, into all-new and perhaps unforeseen uses. This is the nature of the business: sequential creative destruction, elevating all those spaces that have juice left to be squeezed.

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