New Day for Old Industrials
Facility reuse saves dollars and makes sense to both the seller and tenant, as well as to the economic developer.
David Marks, Senior Vice President, Tower Investments, LLC  (Feb/Mar 08)

 As American manufacturers struggle to stay competitive in an industry that is rapidly shifting overseas, commercial property developers are clamoring to find creative, cost-effective solutions for warehouse and distribution space. Gone are the days of assembly-line to shipping operations being housed under one giant roof in Small Town, USA. Today's manufacturing industry leaders have fragmented their operations due to sheer economics. Whether they are assembling goods in China or North Carolina, one constant remains: manufacturers need stateside distribution and warehouse space, and they don't want to break the bank getting it.

Modern manufacturers are investing heavily in technology and systems to increase productivity and functionality of their front-end operations. Innovations in recent years have transformed the face of production, and with each new development, operations become more sophisticated and efficient and less reliant on manpower. Conversely, warehousing and distribution are largely a matter of sufficient cubic feet, proper structural and property components, and access to transportation routes. While innovations - such as keeping inventory electronically, for instance - are being implemented by more and more manufacturers every day, the storing and shipping end of the cycle is largely a nuts-and-bolts operation that requires far less specialization.

While, from a logistics perspective, a company's ideal scenario might be to have all operations under one roof, from a dollars-and-cents standpoint, more often than not it makes much more sense to utilize a separate location for distribution and manufacturing. In the numbers game that industry is at its core, the goal is to find the least expensive set of variables: building overhead and upkeep, long-term investment, and transportation/freight.

Practicality and Creativity
For a commercial property developer, this is where practicality and creativity meet. The globalization of manufacturing has left countless large U.S. industrial properties vacant or underutilized, particularly in small- to mid-sized inland markets in the South and Midwest. At the same time, land and construction prices are skyrocketing, making new facilities pricey undertakings - in the event that well-positioned, appropriate land is available in the first place.

Adaptive reuse is a favored buzzword in commercial property circles and for good reason. By purchasing abandoned or underutilized manufacturing facilities at a reasonable price, making necessary structural changes - often minor for warehousing and distribution purposes - and passing along the good deals to future tenants, developers are providing sound solutions for tenants, sellers, and local economic development interests alike.

From a seller's standpoint, the longer a property sits vacant, the lower its eventual price tag and the higher the likelihood that, by falling into gradual disrepair, it will eventually become a liability rather than an asset. By selling while the structure is still viable, the owner relieves himself of the liability and overhead of upkeep on the building.

Economic development offices are tasked with not only recruiting industry to their areas, but also with coming up with solutions for companies once they arrive. While many offices are building their own industrial parks and then working to lease them, it is a plum situation when an outside firm comes in, buys a property, renovates it, and then works with local entities to find the right tenants for the space.

Furthermore, small- to mid-market areas, their work forces, and their economies have felt the hardest blows of globalization's effects. Not only have jobs and operations gone overseas, but also with those moves, once-bustling industry towns now have empty buildings on their hands. By investing in those properties while they are still salvageable, developers are, as a byproduct, helping these markets keep brownfields off their resumes.

Tenants are the ultimate beneficiaries of adaptive reuse. Rather than building a new warehouse or distribution facility, a tenant now has the option to lease or purchase renovated space at a competitive price, keeping overhead down and business profitable. Ideally, a developer will work with a site selector or company contact as early as possible to ensure that the property is retrofitted appropriately to meet the tenant's needs. It goes without saying that timing is a critical factor in manufacturing. Time lost - be that due to an unfinished building or a logistical error - is money lost. A successful adaptive reuse situation will be one that does not hinder the manufacturer logistically, but rather provides a simple, yet well-orchestrated solution.


An Example
Let me offer an example: A small Southeastern town took what might have been a killing blow a few years back when the major employer pulled up stakes and moved manufacturing operations to China. Hundreds lost jobs, the local economy withered, and the general outlook for the area was bleak at best.

Still, the town had a lot going for it. The area had a proven work force, access to a major interstate, and an active and engaged economic development office - the essential trinity of attracting industry. Fast forward several years, and a new manufacturer moves to town. The company is wrapping up construction on a state-of-the-art manufacturing facility, hiring has commenced, and the final piece of the puzzle is yet to be solved: affordable distribution space to make the decision to keep operations in the United States worthwhile.

Ideally, the new manufacturer would have preferred to build a warehouse and distribution facility on the same site as its production operations. Being able to manufacturer goods, send them to the warehouse on a belt, and house everything under one roof was the logistical best-case-scenario. However, this would have been a costly move. New construction and land costs forced the company to consider smart alternatives.

That takes us back to the major employer who moved to China. When the company moved, it took jobs and revenue away - but it left behind a massive building. The aging reminder of better days was about to become the silver lining for the new manufacturer in town. The new manufacturer's site selection teams had been in touch with a developer who specializes in adaptive reuse to help find a feasible solution. The developer invested in the property, converted it from manufacturing to distribution/warehouse space, and solved the new employer's problem. While it wasn't on the same site, the new property was only a few miles away - still close to interstates and a radically more cost-effective solution than new construction.

The Key Components
This story had a happy ending, but that is not always the case for those investing in buildings with the intention of converting them. The risks can be high, and successful conversion is not a quick venture by anyone's clock. Still, there are key components to look for when considering a purchase for reuse:

• Location - The higher the demand for space, the closer the proximity to major transportation routes - interstate, rail, and air - and the more industry located in the area, the better.
• Local Resources - A friendly economic development office is essential for successful adaptive reuse. Red tape, politics, and public interest are major considerations in converting a property, and it is important to have people on the ground, in the area, who are pro-industry.
• Demand - A smart developer will have a responsive long-view approach to development, not an "if we build it, they will come" attitude. This means staying plugged in on the needs of site selectors, understanding industry trends, and keeping an ear to the ground about trends to come. By no means am I implying that there is no room for creative ideas and new solutions, but the goal of adaptive reuse is to meet existing needs, not to reinvent the wheel.
• Versatility - The more potential uses for a property, the better. Existing features such as working dock doors, solid infrastructure, good cubic footage, well-maintained inroads, and numerous entrances/exits are essential.

Clearly, for the simplicity of the concept, adaptive reuse is not a straightforward business move. There are many variables to consider, and flexibility is critical. That said, in the age of tearing down and rebuilding, it could be both profitable and satisfying to breathe new life into a property either on the verge of decline or on the brink of a fresh start.


David Marks is a senior vice president of Tower Investments, LLC, a national real estate and development company with more than 100 properties in 17 states and an industrial portfolio of 10 million square feet. Tower specializes in finding solutions to meet clients' unique requirements. To learn more, please visit www.towerinv.com.

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