In a matter of months, the coronavirus outbreak has fundamentally impacted the commercial real estate (CRE) landscape. Foremost, COVID-19 remains a humanitarian and public health crisis. Companies across the Pacific Northwest, and the country, have moved quickly to safeguard their employees and transition to new ways of conducting business.
Across various industries, leaders will use the lessons learned during this pandemic to reimagine the nature of their businesses and the role that offices and commercial space will play. Within the CRE industry, it has become apparent that merely adapting to variable conditions will not be sufficient. COVID-19 has led to a mass exodus of traditional tenants, and a significant decrease in leasing activity is expected in the near future. Creatively repositioning existing properties will be essential for the industry to weather the coronavirus storm and be well situated to capitalize on future growth opportunities.
Many existing properties are ripe for repurposing, including hotels. A new survey of American Hotel & Lodging Association (AHLA) members shows the pandemic continues to have a devastating effect on the hotel industry and its employees. In response to an AHLA survey published on July 29, more than half of the respondents said their hotels are in danger of falling into foreclosure, and only 37% said they had enough business to bring back at least half of their employees. Because there will be significant lag time for the hospitality industry to return to normal, hotels are prime to be repurposed into health care facilities or affordable housing, due to existing infrastructure and layouts with many individual rooms.
Retail space, however, remains the sector of the CRE industry where developers, brokers, architects and end users can implement some of the most creative repositioning strategies. A recent report from Coresight Research predicts that as many as 25,000 U.S. stores will close in 2020. Even before the coronavirus outbreak, suburban malls were experiencing store-rationalization trends with reduced shopper traffic and closures. Coronavirus shutdowns may represent a turning point for this sector.
Boutique retail spaces are expected to remain resilient and emerge from COVID-19 with new or existing tenants in place. However, big-box retail spaces and larger ones face the prospect of being repositioned in order to ensure ongoing viability. Large retail spaces can accommodate a variety of other uses, including conversion into centralized culinary hubs for the growing “digital restaurant” industry. Repurposing large retail spaces into kitchens and delivery points for multiple restaurants will allow CRE to meet the online food delivery industry’s growing need for space. Alternatively, the large square footage of these retail spaces is also conducive to social distancing – and these spaces may lend themselves to office collaboration centers where employees can work safely.
Big-box retail can also be reinvented to serve multiple purposes at once. These properties can maintain their retail character in front while their back portions are repurposed to serve as distribution centers or warehouses for e-commerce. This would allow shopping centers to remain viable but not lose their character of use. Suburban shopping centers are also well positioned to recapture parking areas as outside space for restaurants to facilitate socially distant dining.
Underperforming retail sites also have the potential to be repurposed as last-mile warehouses, because of their close proximity to population centers and existing infrastructure improvements. Specifically, many big-box retail spaces have multiple access points and loading docks, allowing for an efficient transition to industrial use. Retail-to-industrial conversions have accelerated. According to CBRE Group, in the past three years, 13.8 million square feet of retail space has been converted to 15.5 million square feet of industrial space. This trend is likely to continue because of coronavirus and the ongoing consumer transition from brick and mortar to online shopping.
Even as we move forward with incremental reopening, it has become apparent that things will not return to the way they once were. The time for developers to act is now. Brainstorming adaptive reuse projects is one thing, but putting plans into effect can take a long time. The regulatory structure of a specific municipality can dictate a project’s duration, which can be months or even years – with challenges arising along the way. Proactively engaging with both a municipality’s planning and economic development departments can help developers map out prospective projects and establish community support.
Adaptive reuse projects are not without their hurdles. Converting a property from one use to another doesn’t always require a zoning change, but when it does, it can take anywhere from two months to a year or more. Additionally, developers also need to remain cognizant that their new vision for a property may be drastically different from the current use. Shopping centers may have existing tenants with long leases or tenants that own their spaces outright. Negotiations with these tenants can draw out a project and create barriers to obtainment of approvals, especially if existing tenants are opposed to the new development plans.
Developers also need to remain alert for structural deficiencies and ensure there is a plan in place to address them, prior to commencing an adaptive reuse project. Conversions of older buildings may require unanticipated work that can result in change orders, cost increases, and even wholesale design changes. By taking an active role in the due diligence phase, in conjunction with design professionals, project owners can help guard against these issues.
There is some good news for developers. Due to COVID-19, municipalities are more open to ensuring the CRE economy gets back on track. As government officials search for creative ways to maintain their tax base, support jobs, and revitalize their local economies, adaptive reuse projects become far more appealing than the alternative: vacant buildings.
Keenan Ordon-Bakalian is an attorney in Jordan Ramis PC’s land use and development practice group. Contact him at 360-567-4843 or firstname.lastname@example.org. This column is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.
The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the DJC guarantees the accuracy or completeness of any information published herein.