The most notable driver of commercial asset volatility is the COVID-19 pandemic, which saw vacancy rates skyrocket nationwide virtually overnight around the first quarter of 2020. While return-to-office strategies were tentatively rolled out months later, the regular emergence of new variants and the seemingly permanent impact of hybrid and work-from-anywhere models have made it difficult to estimate when commercial vacancy rates — now at roughly 16.4% — will return to their 2019 levels of approximately 9%.
Dealmakers and investors are increasingly exploring these opportunities as they see the potential value in repurposing existing structures rather than constructing new buildings. Adaptive-reuse projects offer the advantage of utilizing existing infrastructure and historical character, while meeting the changing demands of the market.
Why Adapt?
There are many benefits when it comes to adapting a building. As opposed to a ground-up project, there is an existing infrastructure and framework that provides contractors to build around. It is important to consider the quality of the original construction and the implementation of the original builder as opposed to the age
of the building, as each has its downsides and opportunities.
Trends In Adaptive Reuse
There has been a growing interest in converting different types of buildings. The most common recently has been office to residential, office to hotel or hotel to residential.
Hotels
Former hotels experienced a record-breaking 2,954 new apartments resulting from conversion, a five-year high, according to recent reports. These conversions were seen as a potential solution to the increased demand for housing and the rejuvenation of deserted downtown areas. Office-to-hotel conversions, like most others, depend on location, but can often be less challenging due to the utilization of the size of the floor plates, which is not always the case in office-to-residential conversions. These projects offer greater economic potential and the ability to monetize spaces, making them an attractive option as an adaptive-reuse project.
It is key to understand the operational aspects of the hotel during the design phase of this type of adaptive reuse, as this can affect the project’s outcome. It requires significant coordination beyond the standard reuse, starting from thoroughly understanding the as-built conditions.
Historical Buildings
Historical buildings pose unique challenges when it comes to energy ratings and sustainability requirements. The question arises whether exceptions or exemptions should be made for these buildings. Adapting historical buildings can create new value and meaning for the areas they inhabit and residents of the surrounding communities, creating new opportunities for economic development. However, issues of balancing the preservation of historical value with the need for energy efficiency is a topic of discussion. It requires careful consideration of how to adapt older buildings to meet modern energy standards, while respecting their historical significance.
While the Environmental Protection Agency states that “a new, green, energy-efficient office building that includes as much as 40% recycled materials would nevertheless take approximately 65 years to recover the energy lost in demolish- ing a comparable existing building,” some buildings can’t be saved. As the world moves toward a low-carbon future, the question is whether these buildings can sustain these goals.
Ongoing Challenges and Opportunities
Adaptive-reuse projects come with various challenges. Structural enhancements may be necessary to ensure buildings meet current safety standards and functionality requirements. Supply chain challenges can arise, such as delays caused by shortages of equipment like chillers or other specialized components. Moreover, the quality of construction and implementation in these projects plays a significant role. It is crucial to ensure that the renovations are executed with high standards to meet not just energy efficiency goals, but that they deliver a safe and functional space.
There is great opportunity to make formerly neglected spaces alive again by making them vibrant destinations and upgrading them with amenities and facilities. This includes incorporating amenities like restaurants, coffee shops, cycle rooms and other features that enhance the user experience. The objective is to create spaces that people want to visit, whether for work or leisure. By transforming buildings into lively environments, cities can revitalize downtown cores and make them more appealing to residents, workers and visitors.
Recent Project
In summer 2022, MGAC was selected to manage the redevelopment of the former Class B office building located at 20 Massachusetts Ave. N.W. in Washington, D.C., originally built in 1973. The project reimagined services across the entirety of the asset’s eight stories, two below-grade parking levels and mechanical and utility systems.
The building was turned into a new mixed-use destination, with the addition of three new stories, a 14,500-square-foot penthouse and a full height and depth bay added to the east end of the building. Openings in existing floor slabs were also added to accommodate two new atria. Also added were new stairs, elevators and other core elements to be outfitted for a range of future uses.
The ground floor consists of expansive retail, a restaurant space, as well as a separate office and hotel lobby. A new, 274-room Royal Sonesta Hotel comprises six floors, while Class A trophy office space occupies the upper four floors. The top penthouse level houses shared amenities, including the grand ballroom, meeting rooms and a large lounge that captures exceptional views of the city. Additional amenities include a fitness center on the second floor, a conference center and a ballroom.
Final Factors
Taking into consideration the many factors that inform an adaptive-reuse project, those who seek to pursue these projects must go into them clear-eyed about what the existing structures offer and what the potential drawbacks are in the project lifecycle. However, all factors considered, adaptive reuse provides an exciting transformational opportunity.
MGAC is a global boutique project, cost and construction management consultancy.
