Goodwin Insights June 08, 2021

Navigating the New Normal: Adaptive Reuse of Space

When you think of adaptive reuse, you likely associate it with turning a rustic barn, an old-time firehouse or former chapel into a cottage, modern loft or chic house. More broadly, however, adaptive reuse is any redesign, renovation or reuse of existing built space originally dedicated to one use but then repurposed for another. In the context of propsci, which we define as space that caters to technology, medical and life sciences use, this may mean repurposing a building originally intended to be a traditional, industrial manufacturing site or a big-box retail center into a combination of office and lab space to be used by life sciences professionals. Identifying and using land and buildings to their highest potential and maximizing the rate of return on their investment is nothing new to real estate property owners and developers. This concept of designating property for maximum productivity is a longstanding capitalist notion, and it ensures that real estate property is dedicated or rededicated to uses that maximize value for not only the owner but also the local community.

As demand for the types of spaces we use shifts and evolves, adaptive reuse enables us to enlist already-developed land to satisfy new demands and uses. In earlier times, these shifts reflected changes in the economy, from agrarian to industrial to service.

As economies continue to move toward tech, digital and knowledge-based, we are witnessing the continuous growth in demand for propsci space coinciding with closures of retail space and, in the aftermath of the COVID-19 pandemic, the expected downsizing of traditional professional services office space. Owners, developers and landlords already have their sights on attracting tenants and users from these rapidly-expanding industries. And post-pandemic, this shift is only expected to accelerate.

“Location, location, location” remains a fundamental mantra. Currently, the construction of propsci spaces is focused in clusters around existing uses that support their development. Historically this clustering has centered around university campuses or medical research centers. Developments focused in the Cambridge, Massachusetts area near Harvard, MIT and other schools, or close to Stanford University in the San Francisco Bay area, are only two examples of regions where the synergy between academia and research has fueled the development of world-class, propsci-centered real estate. 

As these traditional markets became more expensive, owners and investors began to look to other geographical areas proximate to top-notch universities. There, they found similarly educated and highly skilled workforces, along with access to venture capital and other funding. Austin (Texas), the District of Columbia-Baltimore area, Houston (Texas), Los Angeles, New York, Raleigh-Durham (North Carolina), Seattle and San Diego are also burgeoning areas, just to name a few. In several of these locations, there is the added benefit of a lower cost of doing business.

Many of these “life science cluster” opportunities are found in urban or urbanizing areas as opposed to suburban or rural areas where large swaths of open land are generally more available for greenfield development on a large scale. In urban or urbanizing areas, previously developed land and buildings originally constructed for other uses become prime candidates for satisfying the increasing demand for new uses. There are typically limited opportunities in these areas to concentrate multiple supportive uses, but dwindling manufacturing districts, empty big-box retail or gym sites, or underutilized malls provide opportunities to adaptively reuse space for propsci uses. 

Cities and counties throughout the U.S. are increasingly recognizing the benefits propsci institutions bring to their communities in terms of attracting upper-middle class taxpayers and increasing the demand for more housing. This housing growth then catalyzes the growth of supportive commercial uses and generates secondary job growth. However, local governments and developers have realized that modifications to existing zoning either at the site level or community-wide might be necessary to successfully promote the adaptive reuse of property for propsci uses in a manner that complements adjacent and nearby uses (which might be industrial, commercial, residential, or some mix of these uses). The existing zoning designation for a former industrial site might allow for laboratory or other research and development uses subject to satisfaction of criteria specified in the local government’s planning and zoning codes. However, the commercial zoning for former malls or public use zoning for former school sites often do not list such uses as permitted by right or as conditional uses. In these situations, the developer must seek a conditional use permit or pursue rezoning if the use is prohibited or not contemplated by the local codes. These processes require working closely with the staff of the local government, planning and design teams, real estate lawyers, and the public to successfully obtain the approvals necessary to develop or renovate the chosen site. Not surprisingly, many local governments are currently revisiting their general plans and planning and zoning codes to ensure that these desirable new uses can be accommodated and even thrive in their communities. Cities of all sizes appear to be eager to attract propsci uses and develop clusters. One example, the City of Downey (California) located within Los Angeles County has a population just shy of 120,000 and its staff has worked with a consultant to publish a report exploring opportunities to introduce new or modified zoning overlays and other development regulations to promote biomedical facilities in their community as a complement to the county’s efforts to develop healthcare and biomedical clusters.

While adaptive reuse of existing buildings for use as propsci space can provide a reasonable alternative to new construction on vacant land, it is not inexpensive. Fortunately, scientific advances and promising discoveries attract capital from diverse investors and contributors — from venture capital to institutional investors to government funding. According to commercial real estate firm JLL, the U.S. government’s investment in product development through Operation Warp Speed is partially credited to the steady influx of funds to the life sciences industry during the COVID-19 pandemic.1 With the increased commercialization of scientific research in recent decades, life sciences has proven to be one of the few resilient industries not suffering from the dramatic economic effects of this period. In fact, it has continued to grow and thrive as many life sciences companies have even committed resources to solving the health crisis. Unlike many industries that use office space, life sciences professionals do not usually have the option to work remotely. Their facilities are integral to the work they do and cannot be replicated at home. Once funded, securing lab space is a critical next step.

Not all large buildings are suitable for or easily converted to propsci uses. To start, a building must be structurally sound, but conversions from other uses to a combined office and lab space require a more thorough evaluation of the building and its systems eligible for upgrade. Old manufacturing sites, for example, may present hazardous waste challenges. The needs of tech and life sciences users differ greatly from those of manufacturing, retail or traditional office users. Electrical systems, mechanical systems, plumbing systems, structural components, accessibility and insulation are key components of any building that must be modified to meet or address the objectives of new users and to comply with state and local building codes. Ceiling height and layout also may need to be adapted to suit standard dimensions for lab equipment, which often requires higher ceilings for ceiling service panels and spacing set for equipment that is sized according to these standards. As climate change and ESG compliance gain greater importance, owners and tenants of buildings for life sciences and technology industries are seeking sustainable, energy efficient innovations to reduce negative impacts to the environment as well as attendant certifications such as LEED, Fitwel and WELL Building as proof of their successful implementation of such. The technology not only potentially helps to reduce costs over the life of the building, but the certifications attract high-quality tenants and employees.

 Adaptive reuse is a capital intensive process that requires property owners not only to fund their conversion of the base building but, more often than not, to also support the funding of tenant improvements so that tenants can customize their leased space to serve their business or research interests. Opportunity zone investment, historic tax credits and public funding are a few other funding resources available. One of the key considerations for any owner seeking to renovate space is whether to move forward speculatively on a Field of Dreams “build it and they will come” basis or to pursue a tenant who will work with the developer on a “build to suit” basis. In either process, the owner can expect to participate in further customizing the space by constructing, funding or otherwise supporting the tenant’s construction of improvements in the space. These tenant improvements might include items like benching, cabinetry, chemical resistance surfaces, clean rooms, deionized water systems, exhaust systems including fume hoods, process piping and vacuums. In our recent insight “Building Flexible (And Sustainable) Laboratory Spaces for the Future,” which features a guest blogger from architecture firm Gensler, we discuss the benefits of constructing flexible space that can adapt to the ever-changing needs of existing and future life science users. Read the post to learn more about this topic in relation to the various interests of investors, developers, owners and users that must be considered in addition to concepts of flexibility and sustainability.

Despite the many considerations and challenges that impact adaptive reuse projects, it is a gratifying manifestation of human ingenuity to transform something that is old or underutilized into something that is new and rejuvenated. The time is ripe for such innovation. Goodwin is excited to pioneer and support the creativity of its real estate, tech and life sciences clients involved in the propsci arena and hope to showcase examples of their successful projects in future insights.

 

1 JLL, How a boom in life sciences funding impacts real estate, dated March 30, 2021, available online.