Adaptive Reuse and Multifamily Feasibility: Q&A with Golub & Company’s Lee Golub
Adaptive reuse is under consideration as a potential solution to re-purpose office buildings that are outliving their usefulness. But how feasible are such conversions, especially to multifamily? This is one topic that will be addressed by the upcoming Connect Midwest: Multifamily & Adaptive Reuse Trends conference.
To better understand the feasibility of adaptive reuse, Connect CRE posed questions to one of the event’s presenters, Golub & Company’s Lee Golub.
Connect CRE: Are we seeing more adaptive reuse versus ground-up construction when it comes to multifamily development?
Lee Golub: There has been much discussion about what to do with the stock of office product that is either functionally obsolete or only partially leased due to the rise of hybrid and remote work. It’s easy to say, “convert that space to rental apartments or hotels.” In reality, this is easier said than done.
For starters, there needs to be a comprehensive understanding of the physical building itself. We have to understand if the floor plates work for residential use. For example, many office floor plates are deeper than residential floor plates. They don’t transition easily. We also need to know how the windows are related to views and natural light. There are other factors, including sill heights, lobby makeups, and so on.
Another consideration is the building’s location and whether it would work for residents. Is that office building in a residential neighborhood, or one that changing over into one? What about amenities? Can offerings be easily created? If so, would it compete with other amenities in other modern apartment buildings? Finally, are there still office users in the building – and if so, are they willing to share space with residents?
Basically, we need to know how to approach the reality of office-to-multifamily adaptive reuse when considering this new trend.
Connect CRE: What are some additional challenges of multifamily adaptive reuse?
Lee Golub: One core challenge is the economic feasibility of proposed adaptive reuse projects. Many people don’t realize that the cost of adaptive reuse of an existing building is very similar to the cost of ground-up efforts. So developers need to figure out if rents can support the cost of a renovated building versus what rents are being achieved in Class A apartment buildings.
A key driver is what the “land basis” is going into the deal. Most office buildings in financial trouble where adaptive reuse is concerned have existing debt amounts that might not be conducive to the cost of buying land for ground-up construction. In this case, a lender may need to write down the value of the existing mortgage by up to 70%.
In addition, we also need to understand the zoning implications for these projects. For instance, in Chicago, a zoning amendment comes with a 20% affordable requirement at 60% of AMI. This means an additional economic burden.
But there are innovative initiatives to get around this. For example, the city of Chicago’s LaSalle Street reimagined program makes TIF dollars available so it’s more economically feasible to readapt office buildings into multifamily.
Connect CRE: What are some bright spots in the Midwest multifamily sector?
Lee Golub: Overall, the residential rental market in Chicago is very strong. Data from the last 12 months shows that rents are up, occupancy is up, and concessions are lower. At Golub, we see this as a bright spot that we will continue to lean into as we deliver and manage quality projects for our residents, tenants partners and investors.
Meet Lee Golub and other experts at the upcoming Connect Midwest: Multifamily and Adaptive Reuse Trends, which takes place June 13, 2023 at the W Chicago City Center Hotel. Click here for more information and to register.
Adaptive Reuse and Multifamily Feasibility: Q&A with Golub & Company’s Lee Golub
Adaptive Reuse and Multifamily Feasibility: Q&A with Golub & Company’s Lee Golub
Adaptive reuse is under consideration as a potential solution to re-purpose office buildings that are outliving their usefulness. But how feasible are such conversions, especially to multifamily? This is one topic that will be addressed by the upcoming Connect Midwest: Multifamily & Adaptive Reuse Trends conference.
To better understand the feasibility of adaptive reuse, Connect CRE posed questions to one of the event’s presenters, Golub & Company’s Lee Golub.
Connect CRE: Are we seeing more adaptive reuse versus ground-up construction when it comes to multifamily development?
Lee Golub: There has been much discussion about what to do with the stock of office product that is either functionally obsolete or only partially leased due to the rise of hybrid and remote work. It’s easy to say, “convert that space to rental apartments or hotels.” In reality, this is easier said than done.
For starters, there needs to be a comprehensive understanding of the physical building itself. We have to understand if the floor plates work for residential use. For example, many office floor plates are deeper than residential floor plates. They don’t transition easily. We also need to know how the windows are related to views and natural light. There are other factors, including sill heights, lobby makeups, and so on.
Another consideration is the building’s location and whether it would work for residents. Is that office building in a residential neighborhood, or one that changing over into one? What about amenities? Can offerings be easily created? If so, would it compete with other amenities in other modern apartment buildings? Finally, are there still office users in the building – and if so, are they willing to share space with residents?
Basically, we need to know how to approach the reality of office-to-multifamily adaptive reuse when considering this new trend.
Connect CRE: What are some additional challenges of multifamily adaptive reuse?
Lee Golub: One core challenge is the economic feasibility of proposed adaptive reuse projects. Many people don’t realize that the cost of adaptive reuse of an existing building is very similar to the cost of ground-up efforts. So developers need to figure out if rents can support the cost of a renovated building versus what rents are being achieved in Class A apartment buildings.
A key driver is what the “land basis” is going into the deal. Most office buildings in financial trouble where adaptive reuse is concerned have existing debt amounts that might not be conducive to the cost of buying land for ground-up construction. In this case, a lender may need to write down the value of the existing mortgage by up to 70%.
In addition, we also need to understand the zoning implications for these projects. For instance, in Chicago, a zoning amendment comes with a 20% affordable requirement at 60% of AMI. This means an additional economic burden.
But there are innovative initiatives to get around this. For example, the city of Chicago’s LaSalle Street reimagined program makes TIF dollars available so it’s more economically feasible to readapt office buildings into multifamily.
Connect CRE: What are some bright spots in the Midwest multifamily sector?
Lee Golub: Overall, the residential rental market in Chicago is very strong. Data from the last 12 months shows that rents are up, occupancy is up, and concessions are lower. At Golub, we see this as a bright spot that we will continue to lean into as we deliver and manage quality projects for our residents, tenants partners and investors.
Meet Lee Golub and other experts at the upcoming Connect Midwest: Multifamily and Adaptive Reuse Trends, which takes place June 13, 2023 at the W Chicago City Center Hotel. Click here for more information and to register.
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