Giving New Life

ADAPTIVE REUSE

Adaptive reuse offers advantages to ground-up construction.   

By Bill Wilhelm 

Adaptive reuse refers to the redevelopment or use of an old site or building for a purpose other than what it was originally built or designed for. In certain cases, it offers a cost-effective alternative to ground-up construction. The practice has been employed for a wide range of different types of commercial construction projects, including multi-unit housing, retail, office and even museums and Major League Baseball parks.

One asset class where adaptive reuse has been especially fruitful in the last few years is hotels. A primary reason is that adaptive reuse or renovation allows the property to go to market 20 to 30 percent faster than an equal size ground-up. For hotels, that time savings accomplishes several things:

• Puts “heads in beds” faster – Hotels can become operational more quickly, start making money sooner and pay back investors more rapidly. Plus, there is an opportunity cost of reducing months from the construction schedule compared to a ground-up build.

• Saves costs – Traditionally, adaptive reuse costs about 20 percent less than the cost to construct a similar caliber of building from the ground up.

• Hedges against market changes – Labor and materials costs change regularly. Sometimes, it is eye-opening to look back over historical data from prior construction projects to see how much the costs on certain materials rise or fall, depending on the timing. Compressing the construction schedule through adaptive reuse mitigates the risks associated with market upturns or downturns that affect labor and material costs. 

Where Adaptive Reuse Makes Sense

To be clear, adaptive reuse does come with its own set of challenges. But under the right circumstances though, the economics of adaptive reuse are better. Making the numbers work starts with finding value in some component(s) of the existing structure that will generate a return from a cost perspective. Frequently, there is value from a “how much would it cost to replace that?” viewpoint.

For example, a building may require seismic upgrades to meet code, which typically means a significant capital investment. That may be prohibitive and drive a developer toward a teardown and rebuild. Yet, the property may have a sophisticated glazing system on the exterior or a mechanical system that is new or updated.

When balancing the value of the glazing or mechanical system against the cost of the seismic upgrades, the economics may shift toward adaptive reuse or renovation. Each site or building presents a unique case, and the first step for anyone considering adaptive reuse is to identify that element of the current site that has monetary value. Often, the building structure itself or exterior are strong enough to keep. Such was the case during a recent adaptive reuse project that transformed a nondescript concrete office building that was built in the 1960s near LAX Airport into a dual-branded hotel. The structure had concrete fiberglass fins on the outside giving it a stark, uninviting appearance.

However, the building’s structure was sound and the mechanical systems still were working. After stripping the property down to its structural bones and spending about $60 million updating it to modern aesthetic standards, construction on the 260,000 square feet of hotel space with upscale amenities was completed in 16 months, versus a likely 20 to 21 months if it had been a ground-up rebuild.

The Property Value Must Work

A property’s footprint plays a key role in whether to consider adaptive reuse or renovation. Sometimes, there is value in the structure or the shell of a building, but it is oddly shaped or not properly sized. In these types of cases, a developer must ask whether the property will work from an operations standpoint. If not, it may be more beneficial to do ground-up construction.

During a recent hotel adaptive reuse project, the property under consideration had a large amount of square footage that had zero value to the operations or return on investment of the hotel functionality. But the existing structure and glazing was sufficient. Despite the dead space, there remained enough square footage to add the requisite number of keys to make the project pencil out. The property land values had the right terms and conditions. After deep evaluation of the economics of the property, the project advanced.

Where Adaptive Reuse Makes Sense

There are certain market conditions that predispose a project toward adaptive reuse versus ground-up construction, and vice-versa. Secondary and tertiary markets in non-conventional locations or areas of lower population densities are more inclined toward ground-ups. The economics of adaptive reuse become more evident when two related conditions exist: there is demonstrable supply and demand for the asset class being considered and a shortage of available properties in the area.

Adaptive reuse offers clear time- and budget-saving advantages to ground-up construction under specific conditions: the right geography where supply and demand for the asset class exists, a core element(s) at the site or in the building that presents a sufficient amount of value to merit keeping it, and a footprint that makes operational sense for the entity for which the project is being built. If these conditions exist, adaptive reuse makes a very attractive option for bringing a project to completion more quickly than new construction. 

Bill Wilhelm is president of R.D. Olson Construction, an Irvine, Calif.-based general contracting firm founded in 1979. Wilhelm can be reached at bwilhelm@rdolson.com or 949-474-2001. Learn more at rdolson.com.

 

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