Redeveloping an existing commercial building may prove to be a more beneficial route to a ground up development, depending on the specific needs and budget of the project. When executed properly, redevelopment can bear an abundance of advantages. However it is important to determine if it will be the best scenario for your project first.
Here are the important elements to understand about the redevelopment process of commercial properties in order to make an educated decision.
What is a commercial redevelopment?
Redevelopment refers to any new construction on a site that has pre-existing uses. This type of development is conducted with the intention to build something again or differently.
Variations of redevelopment:
- Adaptive reuse - an older structure is converted for improved current market use.
- Urban infill - building to bring more activity to vacant parcels or previously developed buildings.
- Denser land usage - constructing a block of townhouses into a large apartment complex, for example.
- A former bicycle shop and record store converted into two new restaurants
- A historic hardware store turned into the Tuft & Needle mattress company’s headquarters
- A beloved neighborhood bar restored into a hip, new restaurant concept
What are the advantages of a redevelopment?
When executed properly, redeveloping the right commercial property at the right time definitely has its benefits and can even have the power to revitalize a community’s economy. Aside from the possible personal advantages from taking the redevelopment route rather than just ground up – such as cost and time savings and reduced permitting requirements – your project can inadvertently add value past its property lines.
Redeveloping a commercial property raises the likelihood of increased value in the asset. But, the subject property isn’t the only one to benefit from an increase in value and demand. It’s not uncommon for surrounding properties' prices to benefit from an increase in one being revitalized to use as a sales comparable.
- Example: What stands today as a unique restaurant concept, Century Grand, was once a Gino’s East and even a neighborhood dive bar back in its day. SimonCRE redeveloped and added even more value by installing a cell tower behind the building to earn an additional income stream.
The improved value may lead to an increase in business demand in that area such as when a neighborhood center gets a face-lift, its occupancy climbs, and developers take notice when the center becomes more bustling.
- Example: Famous as one of the “Grand” old buildings along Historic Grand Avenue in downtown Phoenix today, the redevelopment of the Tuft & Needle headquarters disrupted more than just the mattress industry. The adaptive reuse project quickly brought more life into the Historic District.
In a larger sense, redevelopment also contributes to protecting the environment and community by reducing previous blight. It may include decreasing crime (if it was previously vacant or run-down); reducing new land disturbance and tree clearing; minimizing the amount of new resources required to manufacture piping, pavements, and building materials; and removing asbestos or lead-based paint.
- Example: One redevelopment project in particular that significantly reduced crime was SimonCRE’s project at 19th Avenue and Buckeye Road in Phoenix. The former grocer building had been vacant and stripped of all its copper. SimonCRE worked through all the challenges to bring two beneficial new users, fulfilling the transformation the property so separately needed.
Similar to any type of development, job creation is likely a direct result due to professionals being hired for positions such as painters, plumbers, litigation, lenders, roofers, electricians, architects, structural engineers, landscape designers, and inspectors. In the case of retail redevelopment, this may even increase since the enhanced property may hire more employees. Another potential scenario would be an increase in staff members if a tenant is expanding its space.
- Example: A former record store and bike shop located in the heart of the Arizona State University trade area was about to close its doors because the owner was retiring. SimonCRE acquired the two-tenant retail property and came in with a new vibrant restaurant use for both new First Watch and Blaze Pizza locations. This project has created more jobs, brought business back into that corner again, and added more dining options for over 71,000 nearby ASU students.
For more in-depth information, check out: Redevelopment Benefits + Examples
What are the disadvantages of redevelopment?
As previously stated, undertaking a redevelopment project can certainly reap its fair share of rewards; however, it may not always be the most profitable answer at all times. Depending on the project and the previous use, there could be more work to do than planned.
Some examples that add unexpected work to the scope include uncovering issues after demolition; needing to complete many items to bring the building up to code; and unanticipated environmental remediation. Specifically, more extensive treatment can end up being needed if the site was formerly a train station, gas station, or dry cleaners. Getting the commercial building to be compliant to current code not only means with the city, state or even federal standards, depending on the situation, but also with the Americans with Disabilities Act (ADA). If it is registered as “historic,” it may have its own set of regulations to comply with in order to receive a grant.
Also, if the property is older, there may be necessary technological upgrades to be made, such as installing electric car charging stations or high-speed internet. A most basic needed upgrade could even be redoing pipes (i.e. old clay pipes could be deteriorated). If the city has upgraded its sewer line, that would also present an expensive challenge. Finally, the community will need to get on board with the new use and may even require a tenant to compromise its design to blend into its surroundings.
Working with an experienced developer may help guard against being blindsided by unaccounted for costs, alleviate issues, and help determine if it will be the most efficient route to take for your project.
What are the unforeseen costs of redevelopment?
As mentioned in the previous section, taking the redevelopment route may not always prove to be the most cost-effective, but perhaps being aware of some potential costs may proactively protect against unforeseen and unaccounted for expenses. Once you identify the potential property and execute a Letter of Intent (LOI), consider partnering with a developer to examine the building systems and confirm project feasibility overall.
Some examples of additional costs that could really add up include improvement costs, consulting fees, and superstructure issues. To emphasize that last point, depending on the makeup of the existing framework and its condition, it can end up tacking on the cost of a major rebuild instead.
Tip: Buffer the budget by tacking on about 10%-15% on estimates to cover any unexpected costs that may arise.
There are also some cost savings to look into to offset costs such as adaptive reuse programs (varies per city). If applicable, cities may also use tax increment financing (TIF) as public financing to subsidize redevelopment, infrastructure or community improvement projects. The Government Property Lease Excise Tax (GPLET) may serve as a driver for redevelopment as it reduces a project's operating costs by replacing the real property tax with an excise tax.
How does the redevelopment process work?
You can probably imagine the amount of thorough due diligence and analysis that can go into transforming a distressed property into a valuable asset, but what are all the steps that go in between? To bring life into an underused or blighted property, a careful, proactive approach must be taken throughout the entire process.
Here is a high level overview to help you get started in the right direction.
- Site Selection & Due Diligence
- Site Investigation Reports (SIR)
- Redevelopment Funding
- Planning & Design
- Construction Management
- Prepare for Occupancy