(as published in Sept/Oct 2019 issue of AZRE Magazine)
You’ve heard it said: “The only thing constant is change.” My parents would say that, and I have learned change can be a hard pill to swallow. Many years later, I have also learned this saying applies to real estate, and perhaps more now than ever.
For at least two decades, redevelopment and urbanization have been a common trend. More recently, however, we have seen much more than remodels and building updates. Current trends are a complete change in use or repurposing of real estate. Examples may include converting unused retail space into office buildings, restaurants or mixed-uses with high-density residential. Even more creatively, U-Haul recently purchased an empty Kmart store located in South Mountain, which it intends to convert into a self-storage facility.
Adaptive reuse is making a big impact on commercial real estate and likely will for several years to come. According to the Urban Land Institute’s Emerging Trends in Real Estate (2019), the repurposing trend is likely to continue over the next decade. As real estate professionals, we had better be prepared to adapt.
Many of the changes are fueled by new technology and consumer preferences. While millennials may be the first to embrace these changes, it is becoming more common across all generations. Perhaps the most obvious changes are seen in the retail space. The impact of e-commerce has disrupted the typical brick-and-mortar stores that we grew up frequenting. Companies like Amazon, Walmart, and others are investing big dollars in online shopping and it’s working! Some real estate professionals believed this would cause a collapse of the brick-and-mortar stores, but stores are proving to be more robust than previously thought. Good retailers are looking for ways to limit their building footprint so they can provide other ways to buy their products (i.e., in-store, online, online with in-store pickup, using an app, etc.) – which has led to the concept of “omni-channel” marketing.
Adaptive reuse can be tricky, and there are several important considerations that arise in these transactions, particularly during the due diligence period. Below are some suggestions.
Use Restrictions. A careful review of recorded use restrictions and CC&Rs should be taken to ensure the proposed use is compliant. Sometimes prohibited uses can appear in the deeds themselves, which can be easily overlooked in the review process. Title review should be done at the due diligence stage or anytime a new use is being considered. For existing retail centers, careful attention should be given to review leases for specific use restrictions that may prohibit an adaptive reuse of property.
Zoning and Land Use. Having a clear understanding of zoning regulations and limitations on development is necessary for a successful repurposing project. Zoning attorneys provide valuable skills and information when working with municipalities and neighbors to help ensure the proposed project is approved.
Surveys. Title review should definitely include a review of an ALTA or NSPS survey, which will indicate easements and other potential restrictions. It is not uncommon to discover shared parking arrangements in mixed-use and larger developments, which could impact your proposed use.
Special Zones or Districts. Opportunity zones have become incredibly popular, and consideration should be given to whether your proposed use is within these zones. Municipalities also have adopted area specific zones and districts, which could help or hurt your proposed use.
Building Code and ADA. Repurposing buildings will most likely trigger properties to conform to existing building codes and current ADA regulations. Architects and engineers can provide valuable insight and estimates on these costs, which can occur both onsite and offsite.
When it comes to embracing change in real estate, developers and property managers should not be afraid to think outside the box. Real estate trends are constantly changing, and only those who adapt will survive. If you stop and think about it, there may be adaptive reuses that compliment and add value to your property.
With more than 10 years of experience, attorney Casey S. Blais is a Shareholder at Burch & Cracchiolo, P.A. (www.bcattorneys.com). He practices in the areas of real estate and commercial litigation. He is part of a robust team of real estate attorneys at Burch & Cracchiolo, which provides exceptional zoning, transactional, and litigation support to developers, lenders, investors, and property managers. Casey may be reached at cblais@bcattorneys.com or 602-234-9929.