The Old Chicago Main Post Office is an iconic property in the Windy City, partially for its art deco architecture, but mostly for the road tunnel that pierces the heart of it. Every day, thousands of Chicagoans drive their cars or ride on trains through the bowels of the Old Post Office as they exit or enter the city from the west. For decades, the Chicago mail system, swollen with volume thanks to the rivalrous mail order department stores Montgomery Ward and Sears, saw its prodigious operations based out of the monolithic structure until almost the turn of the century.
Maybe even more notable than the building’s size and former glory is the scope of the renovation work that took place there over the last couple years. The team behind the $800 million project had its work cut out for it. There was the asbestos remediation that ran into the millions, the structural work related to the street and rail track pass-throughs, and removal of the postal sorting equipment that occupied the cavernous structure all to deal with simultaneously. When the work finished up last year, the project looked to be a success as tenants like Walgreens, Ferrara Candy Company, and others began to occupy the space.
The monumental amount of work required for the project begs a simple question: Is there some way to set our buildings up for success in the future after their initial use may have become obsolete? It seems counterintuitive to build properties for a use other than the one they were originally designed for, but the volume of conversion deals going on right now says otherwise. In a recent report, CBRE counts the number of proposed, completed, or underway retail-to-industrial conversion projects at 59, up from 24 at the start of last year. According to the report, “Many are also freestanding big-box stores with existing dock doors and clear heights compatible with industrial use. Those without compatible design formats are typically demolished and replaced with modern warehouse facilities.” In a world where uses shift with the years and a property can either be easily redeveloped, painstakingly restored like the Old Post Office, or just have its lot scraped, maybe developers should be thinking about future uses when they make their design decisions.
To be sure, projects need to pencil out financially with only their primary, immediate use in mind. An investment that doesn’t quite work can’t be made to succeed based on what it might transform into if market conditions change. But property repurposing is both widespread and successful, as we discussed in our newest research report on repurposing obsolete spaces. If there is a way to build the same thing in a way that is easy to redevelop into another use, it might be worth it.
This does not go for every property type equally. Some assets, like housing in core markets, are likely to hold value for a long, long time. But other property types have been shown, thanks to the coronavirus outbreak, to be risky in the face of prolonged disruption. It’s the usual suspects: retail and hospitality. Each of these property types has a demonstrated track record of being convertible to other uses. For retail, the renovated property type of choice is industrial, where, as the CBRE report outlined, typical big box or mall locations, as well as the layout of the typical big box store, make conversion to distribution space logical for a decade that will be increasingly dominated by eCommerce. This is why big eCommerce operators like Amazon have been buying retail spaces lately, even going so far as to acquire entire shopping malls just to demolish and rebuild distribution space on their sites.
For hospitality, underused properties that fail to generate enough income are being converted to multifamily buildings. According to Vicki Been, deputy mayor for Housing and Economic Development in New York City, “Unfortunately, we’re seeing a tremendous hit to our hotels because of the reduction in tourism, because of the lack of travel—hopefully, most of that will come back. But some of it may not.” Been added that her team has been considering whether hotels can be redeveloped into supporting housing at a lower price point than ground-up affordable housing development. This kind of redevelopment has been successful before, in places like Santa Fe, where an old motel was recently redeveloped into 60 low-income housing units.
A lot of this housing development from hotels is made possible by tax credit incentives like the Low Income Housing Tax Credit (LIHTC). According to R. Lee Harris, president and CEO for Cohen-Esrey Real Estate Services, a company that has successfully performed these transitions before, “Converting old hotels into affordable apartments in small towns is incredibly rewarding. Most of these buildings don’t stand a chance of being repurposed for any other use. Historic tax credits are helpful, but without LIHTCs, the economics simply don’t work.” Of course, LIHTCs and other incentives are not always available.
The answer may be to build properties with an eye to making future transformation easier to perform. As stated earlier, this can’t jeopardize the underlying deal fundamentals themselves, but for investors looking to sink money into higher-risk investments like spec retail or hospitality assets, it could make a lot of sense in terms of making an exit that much easier at the end of the hold period, or earlier if things go poorly. For retail, that wouldn’t require bending over backwards to make a possible industrial redevelopment easier, it would only mean ensuring that store access, dimensions, and loading bays fall within the expected ranges for distribution space. Big box stores are in!
For hotels, this might mean adding kitchens and washer/dryer hookups to units. This kind of approach would work nicely for extended-stay hotels, and perhaps less so for traditional hotel properties. But as the world moves more remote, extended-stay hotels themselves could become more attractive as investments.
This means that big box stores and well-equipped, extended-stay hotels will likely be less risky than smaller stores and traditional hotels in the future, since there is clear demand for these assets to be repurposed to other uses. And good news: Our communities are already used to these property types. We are living in a world where we’ve witnessed big chunks of value disappear due to outside disruption. If risk mitigation is a primary component of hospitality and retail investments in the future, baking in a little flexibility might be an appropriate answer. The Old Post Office might be an art deco relic with world-class amenities, but not every investor can afford that kind of project work.