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Inward Investment Guides

Adaptive Re-Use of Corporate Real Estate

The slow economic recovery and continued real estate recession is creating a costly dilemma for companies looking to dispose of vacant facilities.

Beth Mattson-Teig (Winter 2012)
Newark-based Ironbound Studios has committed to a 30-year lease at a 1950s-era industrial building. The building originally served as a hula-hoop manufacturing plant. Ironbound Studios converted the 77,000-square-foot facility into a new television and film production studio. The location, the structure, and the value were all selling points for the new tenant. Newark-based Ironbound Studios has committed to a 30-year lease at a 1950s-era industrial building. The building originally served as a hula-hoop manufacturing plant. Ironbound Studios converted the 77,000-square-foot facility into a new television and film production studio. The location, the structure, and the value were all selling points for the new tenant.
Companies are downsizing as they try to cut costs and run "leaner and meaner" in the slower economy. Bankruptcies, obsolete facilities, and the continued relocation of manufacturing facilities are just a few of the factors contributing to the burgeoning supply of vacant real estate.

"There is definitely an uptick in this type of activity, and I think there will be more [of this] ahead in the coming years," says P. Barton DeLacy, a senior managing director in the Corporate Valuation Consulting/Energy Group at Cushman & Wakefield in Chicago.

The surge of surplus space runs the gamut across industries - from power plants and hospitals to corporate headquarters and industrial facilities. In Chicago alone, major corporations including Motorola, Sears, and United Airlines have vacated or are looking to vacate their aging suburban campuses. "These big, sprawling suburban campuses, many with manufacturing uses, are going to be problematic," says DeLacy.

According to CoreNet Global - an Atlanta-based association for corporate real estate professionals with nearly 7,000 members - the universe of business space worldwide totals some 200 billion square feet, with 70 billion of that physical space located in the United States. Nationally, various industry sources that track the volume of third-party rentable space are forecasting that office vacancies will decline slightly to 15.7 percent and industrial vacancies to 12.5 percent in 2012. However, the true volume of that excess inventory is more difficult to pinpoint because it does not include owner-occupied facilities. CoreNet Global estimates that the total volume of vacant commercial space in the urban environment including corporate facilities is closer to 30 percent.

Traditionally, companies have relied on demand from new users or developers to re-purpose those facilities. These days, both demand and the capital necessary to redevelop properties are in short supply.

CoreNet is in the process of gathering information for its Corporate Real Estate 2020 forecast. "What we are learning early in the study is that there will be far fewer new buildings developed in the next five to seven years," says Richard Kadzis, vice president of Strategic Communications at CoreNet Global. That coincides with economic forecasts for anemic growth over the next several years, he notes, which creates a challenging climate for disposing of vacant real estate.

Temporary Fix
The challenge for companies is how to get that excess real estate off their books in a down market. One problem for companies stuck with surplus space is the carrying costs. Depending on the size of a project, it may cost as much as $2 million per year to keep security in place and engage in basic maintenance and upkeep, notes DeLacy. "In this economy, nobody has capital to come in and tear things down and rebuild. So the challenge becomes how to reuse these campuses for an interim period of slow or no growth," he says.

Some companies are opting for a temporary fix - leasing the space to tenants at a low rate to help offset maintenance costs until the real estate market improves to the point when the property can be repositioned to a higher and better use. "What is critical is that owners of these campuses have to think of themselves as landlords," says DeLacy. "They all would love to sell it and walk away, but there aren't any buyers."

Some of these efforts are a stopgap to get some cash flow until the market turns. "In many communities you see long-term prospects for growth on the horizon, but you don't see that any time soon," says DeLacy. The fundamentals in the market that dictate a strong economic recovery and drive demand for real estate - increased population, job growth, and GDP growth - have not improved to the level that warrants the demand or the capital necessary to spend money redeveloping these properties. "The bottom line is that there is very little net present value for those facilities without users," DeLacy adds.

Adaptive Reuse

Although some companies are willing to hold onto property until the market recovers, most companies are looking for an exit strategy. "For the most part, corporations don't want to have these properties on their books for a long period of time," says Dwight Hotchkiss, an executive managing director of Client Services at Colliers International in Los Angeles. "So I think we are going to see more and more types of these properties hit the market."

It can be challenging to find new adaptive uses for empty facilities, and one solution is often to think outside the box. "A lot of developers have gotten creative by asking, what can we do to change this property? Tear it down and rebuild? Or is there an adaptive reuse that can be done?" notes Hotchkiss. There are numerous success stories across the country where former industrial facilities, for example, have been recycled for uses ranging from office space and residential lofts to, in one case, a tilapia farm.

Vacant corporate facilities can create attractive opportunities for users who are hoping to snap up empty space for a significant discount. Newark-based Ironbound Studios has committed to a 30-year lease at a 1950s-era industrial building. The building originally served as a hula-hoop manufacturing plant before being converted to a storage facility. The building stood empty for three years before Ironbound Studios stepped in to convert the 77,000-square-foot facility into a new television and film production studio. The location, the structure, and the value were all selling points for the new tenant.

"It is an amazing deal," says Richard Garcia, co-founder of Ironbound Studios in Newark, N.J. The going rate in Newark for commercial space ranges from $18 to $30 per square foot, and the company is paying one-tenth of that for this property.

Searching for Solutions
Location remains a key selling point for vacant property. Case in point is a former Ford assembly plant adjacent to the Hartsfield-Jackson International Airport in Atlanta. Ford closed the 130-acre site in 2008.

"You would never in this day and age be able to acquire, and put together in one swoop, 130 contiguous acres that close to an international airport," says Scott Condra, a senior vice president at Atlanta-based Jacoby Development. The developer purchased the property from Ford in 2008 and is working to redevelop the site.

Jacoby sold 50 acres to the city of Atlanta and the FAA for airport use and is working on redeveloping the remaining 80 acres. The site has been zoned for 6.5 million square feet of mixed-use space. The first phase of the development will start this spring with the construction of a new North America headquarters for Porsche. The project includes a 150,000-square-foot facility that will be used for offices, training facilities, and a visitor center, as well as a 1.6-mile on- and off-road driving course. The project is expected to open in late fall 2013.

Over the last 15+ years, a number of sites have closed - and continue to close - for various reasons. Oftentimes, these manufacturing plants, steel mills, or corporate campuses were originally built away from population centers, but cities have since grown up around them and they are in the midst of the urban landscape. Many of these facilities also are surrounded by an excellent transportation infrastructure. "These sites often provide a great opportunity for redevelopment," says Condra. Repositioning surplus real estate is a significant issue for today's corporations, and it also is an important leadership opportunity in terms of how companies ultimately dispose of or re-use this vacant real estate. "The retrofit or responsible disposition of the building portfolio represents the industry's biggest leadership opportunity within the corporate environment," notes Kadzis.

Providing incentives that encourage private-public partnerships is one viable solution for a long-term approach. For example, there is a bill in Congress that would increase the tax credits for energy-efficient retrofits from $1.80 to $3 per square foot. "If Congress were to pass that measure, it would mean a lot to the retrofit of older buildings, and I think it would accelerate the process of dealing with all of this vacant space, particularly the outdated or abandoned buildings," adds Kadzis.

Ultimately, companies need to find real estate solutions that meet their needs. At the same time, they don't want to abandon a building that could become a blight on a community. "What we're seeing is that every situation is unique. Every campus and large asset has its own story. There is no template or easy answer," explains DeLacy. "Resolving it is best done in a collaborative manner where not only the owner is involved, but also local governments and business leaders are involved to help find a solution or the best ideas to reuse these facilities."

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