Real Estate Reborn for New Uses
“WHAT WAS GOING TO HAPPEN IN THE FUTURE IS HAPPENING TODAY,” NAR’s Chief Economist Lawrence Yun observed in a recent Commercial Market Update presented by the National Association of Realtors®.
While it is still too early to know all the changes likely to occur in commercial real estate as a result of the COVID-19 pandemic, there were certain trends already underway before the economic shutdown that are now likely to accelerate, Yun predicted.
The demand for bricks and mortar retailers was already declining due to the increasing competition from e-commerce. Major retailers such as Lord & Taylor, Neiman Marcus, J. C. Penney, Sears and others had gone out of business, or significantly reduced their retail presence. As much as 10% of small business had followed suit, Yun estimated.
These closings created an increasing number of vacant retail properties, especially in older, less attractive shopping centers. Rather than attempt to re-tenant many of these properties, landlords had been turning to “experience” retailers such as restaurants, food courts, movie theaters or fitness centers to fill the empty spaces and create traffic.
But now, many of these businesses have been closed for extended periods and may not be able to reopen. In today’s environment, landlords and developers need to be increasingly creative in how they plan to use existing property.
With business moving from bricks to clicks, current retail giants like Amazon and Walmart need additional space to store products for home delivery. Not long ago, delivery times could be measured in weeks, but now consumers expect delivery within one to two days or even hours of their purchase. Underperforming retail sites, and even some vacant office spaces, are much closer to customers and have become ideal locations for last-mile warehouses or fulfillment centers.
Since 2017, 13.8 million square feet of retail space across America – equal to about 35 small-format regional malls – have been converted to 15.5 million square feet of industrial space, primarily used as fulfillment centers, according to research released on July 23 by the commercial brokerage firm CBRE, and reported in the National Real Estate Investor (NREI) newsletter.
Another possibility is to use vacated retail centers for multifamily residential. Populated with residents, office workers and shoppers, the unused retail centers could effectively become mixed use centers addressing the continuing shortage of affordable housing. Sharing residential living within walking distance to a grocery store or pharmacy could be especially attractive for senior housing, where golf carts could replace automobiles for running daily errands.
As people become more comfortable working remotely from home, obsolete, largely vacant and older office buildings could also be ideal candidates for conversion to multifamily and mixed uses.
The Mission Lofts development on Columbia Pike in the Bailey’s Crossroads area of Falls Church innovatively combines both functions into 156 individual residential/commercial units, surrounded by private and open meeting areas, conference rooms and spaces for social gathering.
Located in an opportunity zone not far from Arlington County’s Amazon headquarters, the vacant building was an attractive investment opportunity, according to Arlington developer Robert Seldin, CEO of the Highland Square Holdings Development and Construction firm that redeveloped the property.
Originally built in the 1960s, the 173,000 square-foot, 10-story office building, including ample covered parking, housed various Defense Department agencies until they were relocated during the Base Realignment and Closure (BRAC) implementation roughly 10 years ago.
“Unlike most buildings, Mission Lofts allows each of the units to be occupied at all times at the tenants’ choice as either a place to live, a place to work, or a place to do both,” Seldin told Dima Williams, as reported in her April 19 Forbes magazine article.
Real estate in its current form is no longer consistent with how people want to live and work –a serious problem, but also a significant opportunity, Seldin observed in remarks to the Falls Church News Press.
Other sites in Northern Virginia could be similarly attractive, such as the vacant Landmark Mall along the 395 corridor in Alexandria. The city has been working with the mall owners for several years to come up with package to repurpose the mostly vacant sprawling 51-acre mall into an urban community with mixed uses and community open spaces.
In converting old buildings into new uses, developers may need to overcome structural and design issues, including removing asbestos used in the original construction. As more jurisdictions encourage such investments through flexible zoning and financial incentives, developers may be more likely to pursue these projects.
The realities of the new business environment encourage communities and developers to become more bold, adapting their plans to see these properties as creative opportunities to provide new ways to live and work.
Future survival demands “out of the box” thinking, with potential reward for risk takers.
Frank Dillow is a past chair of NVAR’s Realtor® Commercial Council, an NVAR instructor, and a senior commercial broker in Long & Foster‘s Commercial Division. He can be reached at francis.dillow@ longandfoster.com.