Adaptive Reuse Places Property Managers to the Take a look at

Adaptive Reuse Puts Property Managers to the Test

It seems like you can't go a day without making headlines about the creative ways that adaptive reuse gives an obsolete space new life. These type of projects can vary widely and each case must be treated appropriately to reflect the unique characteristics of the existing building and the goals of the redevelopment.

A CPM (Certified Property Manager) will likely be hired to manage this complex asset. There are essentially three aspects of property management that only apply to adaptive reuse and may not be fully considered.

  1. Use combinations and friction points: Most adaptive reuse properties involve more than one use. Not all applications work well together and management can be challenging. For example, multi-family and hotel uses do not complement each other. Multi-family houses are generally not able to take over their proportionate share of common rooms and concierge services from an adjacent hotel use. Frictions and legal disputes are common between the homeowners association and the hotel operator and its agreement. Office and hotel uses are positive, however.

    Before agreeing to manage a mixed-use adaptive reuse, you should understand the points of friction that can arise between uses. Parking and overhead sharing tend to be the two most controversial areas.

  2. Leasing and binding tenants: Tenants who choose adaptive reuse generally share two common characteristics. First, they tend to be younger businesses that want something other than a generic office building, and they often lack the creditworthiness and business time to meet ongoing credit requirements. Large loan tenants are much more likely to live in traditional and institutionally owned buildings for a variety of liability and security reasons. So the chances are good that your leasing success comes from a smaller, less creditworthy tenant.

    Second, adaptive reuse tenants tend not to move after their lease expires because they invest more in leasehold improvements. This leads to higher tenant retention rates. In my experience, the average tenant retention rate in adaptive reuse projects tends to be over 85% regardless of the use – office, retail or residential.

  3. Added complexity: Make sure you are properly paid to manage a more complex property. Despite the fact that the mechanical systems in most adaptive reuse projects have recently been updated, they are hybrid in nature and are often designed specifically for a particular reuse. To maintain systems, it is necessary to know who designed them and where parts can be obtained. But perhaps it's more important to have a Plan B for recovering a system when it fails and it takes days to repair.

    Sharing the cost of the common area among users will be an ongoing challenge that will take time to explain and document the fairness of allocations. Lease approvals take longer as you are likely to be dealing with a startup or smaller company with less credit.

Managing properties for adaptive reuse is more complex than managing most other properties. Don't underestimate the cost of doing the right job. For property owners and investors, my advice is not to be cheaper in hiring property management firms than working with engineering firms in deciding to do an adaptive reuse project.

Adapted from the article "Art of Adaptation" published in the February 2021 issue of the Journal of Property Management.


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