Adaptive Reuse – What Is It and How Does It Impact Commercial Buildings?

If you can thrift clothes, accessories, and other things, it isn’t surprising that one can reuse old buildings, too. That is what many companies are choosing to do in a practice called adaptive reuse. That’s when an entity takes an existing building and repurposes it for a new use. It means renovating an existing building and using it, rather than demolishing it and building something new in its place. While that sounds like it’s a good way to save on resources, it comes with its own set of problems. Let’s explore what those are, and the insurance impact of such changes.

What Is Adaptive Reuse?

Usually, this term is used in a specific context, where an architecturally significant historic building is used for a new purpose. The definition also includes adapting all unused, vacant, abandoned, and underused buildings to newer, more sustainable, and better uses. In the past, experts had predicted that adaptive reuse would be a more common practice over the years. Saurabh Mahajan of Deloitte had stated that 90% of the development in the 2020s would encourage renovating and adaptively using existing buildings. Today, there are many properties, such as malls, that are being repurposed into mixed-use developments. That includes apartments, collaborative office spaces, entertainment spaces, retail outlets, and more.

Adaptive reuse helps preserve the usable structures of older properties. That can mean saving on expenses since renovating existing property is a bit cheaper than building a new project. Foundations, superstructure, and MEP systems need a significant amount of work or replacement. These costs are even higher when you factor in the labor.

Risks Associated with Using Old Buildings as New Use Properties

1.     Hidden Costs

Certain other costs will need to be factored in when using old buildings. That includes construction logistics and using custom materials. Windows may not be of standard sizes. Buildings need to be built up to code. They may have a lack of ADA accessibility or no fire protection. Older constructions also include certain parts that were made from potentially hazardous materials, such as asbestos. Those would have to be replaced. Like these, there are many other hidden costs of using old buildings that one would have to consider.

2.     Location

Properties that can be reused come with many benefits, such as being located in a prime area. Such locations tend to have many businesses, so new businesses must ensure they complement the surrounding shops as well. You’ll have to assess the competition and determine whether your business will do well in that area. These buildings tend to do be in high-traffic locations in urban areas, which would give any new business excellent exposure. Just be cognizant of your competitors in such locations and you’re good to go.

3.     Existing Structural Issues

Adaptive-reuse projects would involve some level of new constructions or an expansion of space. These always start within existing structures. Since such properties begin with a property in a state of disrepair, a high rate of vacancy, or with the highest and best use in transition, the old structure may not be productive or economically viable. These will have to be scrutinized with a sharp eye or you could face many severe issues at a later stage.

4.     Economic Viability

The new property must pass the ultimate test of the highest and best use. This must be physically possible as well as legally permissible. These also have to be economically viable. Local government incentives are necessary to make a project economically viable because of the cost of assembling parts, higher costs of repurposing materials, and a higher cost-overrun risk factor than new construction would post. There are also speculative lease-up risks to consider.

Impact on Commercial Real Estate

There’s a vast array of benefits in real estate that would appeal to those looking for commercial property. For example, there are a few incentives that would attract them. Those include federal and state tax credits. The Federal Historic Rehabilitation Tax Incentives Program gives up to 20% credit on certain structures. The savings can be considerable. Adaptive reuse significantly decreases new construction costs and removes the need to purchase vacant land. A 2016 study case study of revitalized downtown areas by the National Trust’s Research and Policy Lab found new commercial development costs are approximately $92 per square foot. When you compare that to $37 per square foot for the rehabilitation of existing buildings, that is quite a drastic difference.

How Does This Impact Your Insurance Policy?

Typical commercial property insurance protects various elements in the business, including property insurance for customers. These normally assess the value of a building’s assets and other physical assets. Several factors go into assessing what the replacement value for the property would be and the level of coverage the business should get. With refurbished properties, this assessment may differ according to the age of the property, whether it has experienced damage and replacements in the past, and more. Insurers would also assess the location of the property and whether it’s prone to natural disasters.

If you’re planning on establishing an adaptive reuse plan, you’ll have to look into all the relevant insurance considerations before choosing the appropriate policy. Partner with an experienced policy provider to have a personal conversation about your specific needs. That way, you’ll get the best coverage possible for your business.