Here is a wonderful irony: In Winston-Salem, NC, what was once a factory and warehouse that produced nearly half of the cigarettes in the U.S. during World War II, has been transformed into the gleaming Wake Forest Biotech Place, where the mission is curing disease. Meanwhile, in Atlanta, what was once Sears’ largest distribution complex — serving the entire Southeast — is being transformed into the 1.1-million-square-foot Ponce City Market, the city’s largest adaptive reuse project, a mixed-use development whose centerpiece will be an iconic, destination food marketplace.
The old, in sum, can be used as a catalyst for economic revitalization, helping to convert a town, city or county’s economic engine from the old economy to the new. As it happens, old warehouses can be excellent candidates for adaptive reuse for several reasons:
- Their interiors are open with wide spaces between columns, resulting in decreased redevelopmentcosts compared to other types of older properties.
- If the property is more than 50 years old, it could qualify for historic tax credits and/or other tax incentives, such as The New Markets Tax Credit Program, credits for low-income housing, as well as Historic Preservation Tax Credits. (See sidebar on How the Historic Preservation Tax Credit Works.) Many states, too, offer their own historic tax credit programs.
- For those seeking historic tax credits, old warehouses face less regulatory scrutiny than other product types because their key distinguishing architectural features such as facades and windows, are on the exterior, not the interior.
- Location is critical; if these warehouses are situated in central business districts (CBDs) or near-in suburbs, close to mass transit and other infrastructure, they represent an attractive possibility to create unique, pedestrian-friendly, amenity-rich places.
- Developers often find that the public and municipal authorities embrace plans to redevelop older properties — particularly if they are part of a larger area earmarked for revitalization — more readily than they might new construction.
But, as advised by Larry Curtis, president of WinnDevelopment and member of the Board of Trustees of the National Trust for Historic Preservation, these kinds of developments are “not for the hobbyist.” In the words of Jim Irwin, vice president of development for Jamestown Properties, they require an equal mix of creativity, financial flexibility, and patient capital.
These developments can also present a minefield of challenges, including prohibitive costs to address environmental issues, financing, and fine-tuning market demand. To understand the challenges inherent in a prospective acquisition, John Leith-Tetrault, president of the National Trust Community Investment Corp. (NTCIC), a subsidiary of the National Trust for Historic Preservation, advised seeking out a preservation consultant to walk through a building before committing to it, looking for red flags. He noted that design issues could prohibit approval of historic status by the U.S. National Park Service. As he and developers have stressed, the fact is that redevelopment costs are higher than the cost of new construction.
By most accounts, many redevelopments of historic properties are using federal and state tax credits. Why? “But for that help they wouldn’t be going forward,” said Bill MacRostie, principal of MacRostie Historic Advisors LLC.
Tax credits work extremely well on larger projects, but less so on Main Street USA, Curtis pointed out, adding that the National Trust for Historic Preservation is making an effort to make the process for smaller projects more user-friendly, which is good, because this ownership tends to be in noninstitutional hands. Financing can be a challenge because these are complex, not cookie-cutter deals, so major banks may be more amenable than smaller financial sources.
WinnDevelopment likes to find properties in communities that need some “oomph” to their economic engine and Curtis advised developers to consider “B” cities that are 50 miles outside of a major metro area. “These are still great places to live,” he said. The company is working on the second phase of Boott Mills in Lowell, MA, with housing and commercial development valued at $1 billion.
For its part, HRI Properties — which has done 50 large-scale developments worth several billion dollars around the country — is best known for converting an old 20-block riverfront warehouse area in New Orleans into a vibrant residential and mixed-use community. The company is now looking at Texas and the Northeast for new redevelopment possibilities. Hal Fairbanks, HRI’s vice president of acquisitions explained that a development’s location and a community’s willingness to see a conversion happen are key. As company president Pres Kabacoff remarked, “we have enough experience to know that if we take on a project we can make it work. And if it doesn’t pencil out or qualify for historic tax credits, we’ll pass on it.”
New Life for a Defunct Distribution Complex
The restoration of Ponce City Market will create a vibrant urban centerpiece that combines unique retail, restaurant, office, and residential spaces in Atlanta.
History: A 2.1-million-square-foot distribution complex for Sears, the largest in the Southeast, built in 1926 and added onto three times since, had operated until the late 1980s. The city of Atlanta bought the property in 1990 and dubbed it City Hall East, but never used more than 10 percent of it. It became a cash drain on the city, to the tune of roughly $800,000 a year. When the new mayor, a fan of food markets like Chelsea Market in New York City, was elected, one of his priorities was to sell the building. So, he reached out to Jamestown Properties (owner of Chelsea Market) and Jamestown bought the property from the city in July 2011. In concert with the city, Jamestown worked on the plan and developed schematics. The company essentially knew how the redevelopment would be done and that the plan would be approved, before it bought the property.
The Plan: The 16-acre site is being transformed into Ponce City Market, a 1.1-million-square-foot, pedestrian-oriented mixed-use development, with 330,000 square feet of street-level retail, including a 70,000-square-foot destination food hall; 450,000 square feet of loft office space; and 260 residential units in the same structure. How does the developer approach creating separate uses, separate parking areas, sensitive design of pedestrian and vehicular flow in this behemoth? “Cut it into digestible pieces,” said Jim Irwin. Having the financial wherewithal to be patient helps too, in making adjustments to the plan as it finds opportunities, he said. The development is expected to open by late Spring 2014.
Quirks and Surprises: The massive building was a time capsule, according to Irwin. The company saved everything of historic value it could, working with local artisans to repurpose artifacts as art. One major surprise: finding the original maple flooring under layers of additions; it is now being restored. Irwin noted that “you have to be far enough along in the design process to understand how the building works.”
From Tobacco to Biotech
History: The 242,000-square-foot Biotech Place is Wake Forest Baptist Medical Center’s newest research facility. It is the medical center’s sixth building in the growing Innovation Quarter (formerly known as Piedmont Triad Research Park (PTRP). It had been two tobacco facilities once owned by R.J. Reynolds Tobacco Co., which donated the decrepit and vacant properties to PTRP, who subsequently sold them to Wexford Science & Technology, LLC. (The building is leased back to Wake Forest.) Restoration and retrofitting of the buildings was done in 18 months at a cost of more than $100 million. The project was financed through the North Carolina Mill Rehabilitation Tax Credits program and the federal New Markets and Historic Tax Credits.
The Plan: The buildings were gutted and stripped to the core on the interior and then refitted with all new mechanical, HVAC, electrical systems, fire protection, and vertical transportation systems to bring them up to current commercial code and LEED principles. Biotech Place comprises 80 percent labs and 20 percent office space. It features a 7,500-square-foot glass atrium that illuminates the building’s center, is five stories tall on the south side and three stories high on the north side. The south end of the building was originally constructed in 1937 and features a distinctive glass block exterior. The northern end of the building has a brick facade and was completed in 1962. The facility also features conference space, an auditorium, and a cafe, opening in late 2011.
Quirks and Surprises: Dan Cramer, executive vice president, Wexford Science & Technology, LLC, said the biggest challenge was to maintain the integrity of the building. Because the glass block was historic, it had to be retained. Each glass block was inspected to decide which to keep, repair, or get rid of. Fortunately, there were several pallets of original glass block at the site that could be used as replacements.
Wexford and Wake Forest acquired the block in front of Biotech Place and plan to develop it into a public park featuring concerts and movies at midnight. In addition, an old rail line behind the facility will be turned into a trail that will connect with existing trails, enabling 30 miles for walking or biking.
(Wexford Science & Technology has served as the main development company of private equity firm Wexford Equities; in late March the REIT BioMed Realty agreed to a $640 million merger with Wexford Science & Technology, which is expected to operate as a subsidiary of the REIT, after the transaction’s expected closing in the third quarter of this year.)
HRI Properties’ Cotton Mill condominium project is part of the 20-block New Orleans Warehouse District site. The property features a 25,000-squarefoot courtyard, a renovated water tower, pool, party room, and 8,000 square feet of commercial space.
What about Smaller Suburban Warehouses?
Even though some suburban warehouses have reached, or are approaching, the 50-year mark that is a requirement for receipt of historic tax credits, developers and brokers have not seen a discernible trend in their adaptive reuse. (Anecdotally, there have been instances of conversions to offices, entertainment facilities, data centers, and even TV and movie production space.) But they are typically not located in areas where young people and empty nesters want to live, work or shop; nor are they close to mass transit.
Forsgate Industrial Partners has been successful in redeveloping older industrial facilities in the Meadowlands area of New Jersey, mostly into modern industrial facilities, though one building did become an outlet store for ABC Carpet & Home. But the company has, thus far, not repurposed these facilities into uses like housing or creative office space. Andrew Moss, director of leasing, advised those considering an adaptive reuse:
- Do achievable market rents justify a property’s acquisition costs?
- Surprises get costly. Talk to the municipality where you want to do the redevelopment to gauge its interest. Conduct your due diligence.
- Is there enough parking?
- After you find the building, step back and consider what the backup plan might be if the redevelopment concept does not work.
- Beware of transforming an old warehouse to entertainment use or retail: the tenants may not be creditworthy and may not last.
(Case in point: In the northern New Jersey town of Maywood, an old warehouse measuring 100,000 square feet saw new life for five years as Velocity 17, a Go-Kart and games facility. In October 2012, Velocity 17 declared insolvency and the property owner claimed it was owed $2.5 million in back rent. But the story has a happy ending. Hackensack University Medical Center subsequently acquired the property and is transforming it — complete with a second story addition — into a $22 million wellness center and gym.)
Less Time on the Road
To make next-day service more challenging, as Curtis Spencer, president, IMS Worldwide, Inc. and Steve Schellenberg, vice president, supply chain, IMS Worldwide, point out in their NAIOP Research Foundation paper “The New Borderless Marketplace: Repositioning Retail and Warehouse Properties for Tomorrow,” new truck-driver restrictions set by the federal government are likely to increase the need for closer distribution centers or multi-driver systems. Under the U.S. Department of Transportation’s regulations for hours-of-service for drivers, whose compliance date is July 1, 2013, there will be an 11-hour daily limit for driving and a weekly cap on total hours of 60 to 70 hours, compared to 82 hours previously.
New E-Commerce-Friendly Warehouse/Distribution Centers
Retailing is moving inexorably online and how e-tailers provide fulfillment and delivery services for their customers is influencing new warehouse/distribution center design. In short, e-commerce businesses want to be close to us. They know that we want our goods quickly and we don’t want to pay a lot for shipping, either on delivery or for returns. The best way to achieve that now is to situate distribution facilities close to major population centers. Next-day delivery is the current goal for e-commerce purveyors, but the Holy Grail clearly is same-day delivery, which Google is currently experimenting with in San Francisco and others are surely eyeing carefully.
Jason Ovadia, senior vice president, logistics and industrial, Jones Lang LaSalle, pointed out that one third of all demand for big box warehouse space has been tied to multichannel retailers or e-tailers seeking regional distribution facilities to accommodate next-day delivery.
According to Ovadia, the East Bay market is ripe for new warehouse/distribution construction due to an older existing stock, red-hot activity in the first quarter, and access to the Port of Oakland, which is expected to double its cargo capacity in the coming years, through the addition of new terminals, truck parking, and numerous other improvements. Ovadia is marketing the first new development in 30 years in the Oakland Enterprise Zone, built on a speculative basis. The 375,000-square-foot Goodman Logistics Center, expected to open in fall 2013, is built for today’s logistics, he said, a just-in-time model for one-day shipping.
Meanwhile, in San Bernardino, CA, another spec building, built last year, has found e-commerce success. HauteLook, Inc., a whollyowned subsidiary of Nordstrom, Inc., leased the 604,000-square-foot Glen Helen Distribution Center building for 10 years. HauteLook is a members-only shopping website offering limited-time sale events with top brands in women’s and men’s fashion and accessories, beauty, kids’ apparel, toys, and home decor. Although the company might have found a suitable distribution center out of state, it wanted to be close to parent Nordstrom’s headquarters.
How do their facility needs differ from those of conventional retailers? Clark Neuhoff, chief development officer, Alere Property Group, explained that HauteLook required a variety of additional and different elements. They needed more power, a total of 8,000 amps; 35,000 square feet of office space to accommodate a large employee roster, which is more office space than the amount usually built into conventional warehouse/distribution facilities; full air conditioning for employee comfort; 300 parking spaces (which required taking out one-third of the truck court); and 10,000 square feet of mezzanine space for senior staff to observe warehouse operations. Clear height is 32 feet and Neuhoff said it didn’t need to be higher than that.
Alere is likely to incorporate some of what he and Alere vice president Matt Englhard learned from this project: making sure to include sufficient space for parking; building in as much power capacity as possible; and placing less emphasis on cross-docking. “They don’t seem to operate that way,” he said.
As for the future of e-commerce distribution, as Neuhoff noted, predictions are difficult because everything changes so quickly in this business. Consider, for example, two mobile fulfillment systems that could alter the size and configuration of distribution facilities. One is Kiva Systems, purchased for $775 million last year by Amazon, which brings products to the operator in a distribution facility via inventory “pods” and is said to be two- to three-times faster than human picking and packing. (To see how it works, go to kivasystems.com/resources/demo.)
Swisslog’s Click&Pick System brings projects to the operator too, via a 3-D system consisting of bins stacked on top of each other in a grid, accessed by robots that roll atop the grid and can run for 22 hours without a charge. They are said to be able to fill 1,000 orders in an hour and an individual order as fast as 20 minutes. Mostly seen in Europe, it is making its U.S. debut with Chicago-based Medline. (To see how it works, go to YouTube.)
How the Historic Tax Credit Works
Historic tax credits represent a dollar-for-dollar reduction of federal taxes owed. Since its inception in 1978, the credit has encouraged the rehabilitation of more than 38,000 historic properties, representing nearly $100 billion in private investment. According to the National Trust for Historic Preservation, the program has been so successful that nearly half the states now have similar programs.
Certified historic structures that are at least 50 years old are eligible for a credit equal to 20 percent of the cost of rehabilitation. Properties built before 1936, that are not eligible for individual listing on the National Register of Historic Places, nor eligible for inclusion in a certified historic district (considered non-historic, non-contributing structures) are eligible for a credit equal to 10 percent of the cost of rehabilitation.
Using the federal historic tax credit is a three-step process governed by regulations and procedures of the U.S. National Park Service (NPS) and the U.S. Internal Revenue Service (IRS):
Qualifying — The owner determines whether the project will qualify for the 10 or the 20 percent tax credit based on IRS and NPS qualification criteria;
Earning — The owner follows the procedure established by the NPS to earn the credits; and
Redeeming — The owner consults IRS regulations to determine his/her ability to redeem the credits earned as a credit against federal tax liability.
The National Trust Community Investment Corp. (NTCIC), a subsidiary of the National Trust for Historic Preservation, makes equity investments in projects around the country that qualify for Federal and state historic tax credits as well as tax credits for low-income housing, new markets, and solar tax credits. According to NTCIC, since 2000, it has placed more than $575 million in equity and debt toward 85 projects with total development costs of over $2 billion.
Voluminous information about tax credits, their economic impact, and state tax credit programs, as well as calculators to determine your project’s qualification level and its potential economic impact, are available on the National Trust for Historic Preservation’s website and that of the NTCIC.
For more information: