Treasure Island in San Francisco Bay was home to the Pacific Fleet in World War II. In Washington, D.C., a triangular 1941 building at a busy intersection housed a Sears store. And a 21-acre Milwaukee site was where Pabst once brewed its “blue-ribbon” beer.

What could these locations possibly have in common?

They are all sites, or planned sites, of shopping centers and mixed-use projects.

Reusing second-hand buildings is part of a trend called adaptive reuse — and it's growing in popularity.

As developers move into the city with urban infill projects, they often find the best-situated property has for years been used for another purpose — and has gained landmark status as a result. So they buy the land and preserve some of the buildings to satisfy historical preservation organizations, neighborhood residents and investors.

“I think most of the projects we are currently working on are infill locations involving the reuse of existing property and making better use of underutilized property,” says Rick Moses, senior vice president and chief development officer at Los Angeles-based Caruso Affiliated, which is building a lifestyle center at the site of a horse racing track in Albany, Calif.

Building on land that was once used for something entirely different is common today, as greenfield sites disappear from the market and urban revitalization takes hold, says Michael Beyard, a senior residential fellow for retail and entertainment development at the Urban Land Institute. “Low density, single-use may have been appropriate as a first wave of development,” he says, “but our cities have grown so that they are now more suitable for more dense uses.”

No national figure exists for retail square footage built in urban infill locations versus greenfield space. And it varies from market to market. But often in dense, and affluent, markets such as San Francisco and New York, land is scarce and adaptive reuse is all that's remains.

Moreover, with the announced closing this year of 33 major U.S. military bases, retail interest in pre-used land in prime locations is gaining ground. When the Navy said it will ground lease 16 acres at its San Diego base for a mixed-use project, demand was so intense for the site that more than 400 people attended a preliminary request for proposal meeting.

Smooth Landing

One example of how an old base can be revitalized is OliverMcMillan's The Glen Town Center in suburban Chicago. The project, at the site of the former Glenview Naval Air Station, includes a revived 1920 airplane hangar and control tower. Hangar One, as it's called, houses a Book Market. Also salvaged were the facades of office buildings at two ends of the project. During WWII, the Naval Station was the U.S. Armed Forces primary training base.

The new center is home to Von Maur department store and Jos. A. Bank, Ann Taylor Loft, Zales and Ulta Salon, among others retailers, and is planning to fill a large space (vacated by a gourmet food store, The Market, whose owners, former Wal-Mart executives, declared their company bankrupt) with a cluster of home furnishings stores. Another section, where there's been some turnover, will have apparel retailers as tenants.

Adaptive reuse is not always cheap — especially when dilapidated old buildings and grounds must be redeveloped and utilities modernized — or easy. For the $1 billion Treasury Island redevelopment, developer Kenwood Investments LLC, a San Francisco-based private equity real estate firm, plans to spend an estimated $20 million to build a new ferry to bring shoppers and island residents of the proposed mixed-use complex to and from the mainland.

Atlantic Station, built at a 1901 old steel mill in Atlanta by Jacoby Development, took 10 years to build and is valued at between $4 and $5 billion dollars.

And at 4500 Wisconsin, the old Sears building in D.C., the Madison Retail Group and Roadside Development had to reinforce the structure and add columns to take the load of the apartments being built over the retail spaces, says Richard Lake, a managing principal at Madison Retail and partner at Roadside.

“This is not by any means a cookie-cutter project,” says Lake. “But this was a great location and it's something we're proud of.” Indeed, Roadship Development plans to turn an 1881 marketplace near the D.C. convention center into a retail center. But first it has to rebuild the roof, which collapsed during a snowstorm.

Landmark status

Still, says Lake, costs can be cut when you work with a relatively sound original structure. In this case, the Sears store had subsequently been a Hechingers before that chain filed for bankruptcy.

In any case, developers increasingly have no choice. Adaptive reuse often carries with it strict landmark preservation clauses. If a developer wants the prime property, it usually has to agree to retain some of its historic charms.

Paul Buss, a partner at San Diego-based OliverMcMillan, which itself is based in an historic Fellowship of the Eagles building from the 1920s, sees two challenges to adaptive reuse: Procedural and mechanical.

In the former case, he says, it's often difficult to establish the standard for redeveloping a building that may have been remodeled over the years. “The criteria of one person in an historical preservation group doesn't always agree with that of another,” Buss says.

The latter involves installing mechanical and electrical processes while still preserving the historical aspects of a property.

Developers need to work closely with government officials on any adaptive reuse project. “If you don't have these partnerships, these things are not going to happen,” says Jim Jacoby, chairman of Jacoby Development Inc.

City governments are also more willing to create the zoning changes required to bring about mixed-use development. For example, Greenwich, Conn.-based Antares Real Estate spent over $200 million for 82 acres of former industrial land along the waterfront in Stamford, Conn. in the hopes of converting it to a mixed-use residential, retail and office project.

Rezoning that land from industrial to allow mixed-uses could take a year, says Bruce Macleod, chief operating officer of Antares.

“We have had a lot of encouragement from the city and a lot of plans that have been done suggest a mixed-use development so it is not that we are going counter to what the city is thinking,” says Macleod. “But it's important that you understand what the city is looking for and you don't do anything counter to what they want.”

Macleod says cities will oftentimes tack on affordable housing obligations for such large-scale residential projects. “They usually have some fundamental concerns such as affordable housing,” says Macleod. “In addition to being mandated, it is something that we are happy to comply with.”

And at the end of the rainbow can be a pot of gold, says Bill Struever, president and chief executive of Struever Bros. Eccles & Rouse Inc., which has has been a pioneer in converting old buildings for new uses. Struever is turning warehouses at the Durham, N.C., American Tobacco Historic District, once home to the cigarette factory where Lucky Strikes were manufactured, into a mixed-use project including retail, office and residences.

Struever Bros. restored old sections of the complex including the original Lucky Strike Tower.

Payoff time

For one adaptive reuse project in Baltimore's Inner Harbor, Struever says that five years ago his company subsidized local tenants with rents as low as $10 a square foot. Now, national tenants are offering to pay $60 a square foot to lease space. “Retailers have discovered the wonderful untapped markets of the cities,” says Struever.

Overall, infill projects in high-density markets have greater upside potential than greenfield projects, says McLean. Whereas greenfield projects eventually invite more development and thus more competition, urban projects have a greater potential for higher profits for tenants because of the barriers to entry in these markets. And with higher profits come higher rents.

“We can be more aligned with our retailers to drive higher sales so it is more beneficial to both partners,” says McLean.

Not For The Faint Of Heart

Adaptive reuse has many challenges that can add to the cost and timeframe of a project. Take for example Vestar Development Co. and Kimco Realty Corp.'s District at Tustin Legacy; a $230 million lifestyle center on the former Tustin Marine Air Base in Southern California.

The developers first had to win approval from the city of Tustin, which evaluated 40 requests for proposals. A second round compared bids from five developers. After two years, Vestar's plan for a 1 million-square-foot hybrid power/lifestyle center was chosen.

Vestar/Kimco Tustin then had to spend $55 million for infrastructure such as water, sewer and utilities. But it was worth it, says Axell. “To find 100 acres in central Orange County (Calif.) as an urban infill area is something that comes along once in a lifetime,” says Jeff Axtell, Vestar project director. In fact, area demographics are so impressive, that the city of Tustin is not providing any incentives for the project. There are about 1.5 million living within a ten-mile radius of the project; 90 percent earning over $100,000 a year, says Axtell.

Along with the expense of adding infrastructure, Vestar also had to work with a variety of state and local government agencies. Just to add an extra lane to a nearby road required dealing with eight different government agencies, says Axtell.

“The truth is that it is all about location and these types of projects require more private and public partnerships,” says George Black, a senior associate with Development Design Group.
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