The current climate will encourage more developers to find smaller redevelopment and adaptive use projects to keep their companies busy. “Developers don’t want to stop, and necessity becomes the mother of invention.”

With continued tight capital and weak markets for greenfield projects, adaptive use is increasingly attractive to savvy developers—and to governments looking to create local jobs and fight climate change. But formidable challenges remain.

As chronic weakness continues in U.S. greenfield development markets, inner-city regeneration remains a relative bright spot—and indications are that it is getting brighter. Adaptive use projects are getting particular attention, thanks in part to increasing government incentives.

“The evidence that governments are encouraging adaptive use is growing,” says Liz Dunn, director of the National Trust for Historic Preservation’s Preservation Green Lab, and a Seattle-area developer. “All of the projects being pursued by the Preservation Green Lab are in partnership with local governments.”

mehaffeyrenovate_3_300The federal government also is stepping up its support. In October 2009, President Obama issued an executive order that required the federal government to redevelop its own massive inventory of buildings through adaptive use and green renovation. Under the order, planning for new facilities or leases also has to consider sites that are pedestrian-friendly, accessible to public transit, and within existing central cities.

Robin Graf, regional commissioner for the General Services Administration’s Public Building Services for the Seattle area, says this means big changes in practice that are likely to shape larger markets. “We’re certainly greening our inventory. It’s a new day,” he says. As an example, he cites the Edith Green–Wendell Wyatt Federal Building in downtown Portland, Oregon, which will receive $130 million in federal stimulus money for a state-of-the-art sustainability retrofit. The project will include a rooftop solar array, 50 percent reduction in lighting energy, 65 percent reduction in water use, and a renovated energy-efficient exterior.

Private developers are clearly taking advantage of the government incentives. Ron Staley, senior vice president of the Lansing, Michigan–based Christman Company, says his firm is increasingly working with governments in public/private collaborations. “We’re seeing governments at local, state, and federal levels working to use existing or new tools for reuse projects,” he says.

Projects underway range from small buildings to ambitious large-scale neighborhood redevelopments. Examples of the latter include Milwaukee’s seven-block redevelopment of its Old Pabst Brewery, San Antonio’s 33-acre (13-ha) Pearl Brewery development, and North Charleston, South Carolina’s redevelopment of its Navy Yard, along with a surrounding 3,000-acre (1,200-ha) Noisette neighborhood.

mehaffeyrenovate_4_300John Knott, CEO of the North Charleston–based Noisette Company, cautions that it takes a significant set of additional skills to manage the challenges of adaptive use. His company is now redeveloping the former Navy Yard, and working to regenerate the surrounding community in close collaboration with area stakeholders.

Staley says one of his firm’s typical adaptive use projects will combine a complex mix of resources: federal historic tax credits, federal brownfield development loans, state historic tax credits, state brownfield credits, tax increment financing, property tax abatements, and other tools. Partners have often included governments, institutions, and other businesses that have to find new structures to work together effectively. “Creativity at many levels allowed these projects to move forward,” he says.

Knott agrees that the process is daunting—the shortage of construction financing right now is especially difficult—but for the most part, “the tools are there.” The most important thing governments can do now, he thinks, is to streamline permitting and shorten time to reduce risk, and thereby increase certainty. “Most developers will respond if they have the skill set; 80 percent of developers just want to know the rules,” he says.

Portland, Oregon, has clearly bet its economic future on green development, including prominent adaptive use projects—most recently, a just-announced new North American headquarters for Danish firm Vestas Wind Systems, an adaptive use of a historic 200,000-square-foot (18,600-sq-m) warehouse in the city’s historic Pearl District. That neighborhood has already seen economic success, including adaptive use projects like the Brewery Blocks, Chown Pella Lofts, and, most recently, the Gerding Theater, a conversion of a 19th-century armory, rated Platinum under the Leadership in Energy and Environmental Design (LEED) program.

Stuart Cowan, an economic consultant who worked on the Gerding Theater and other noted adaptive use projects, says they also used a customized mix of revenue sources, including new markets tax credits, a local improvement district, local urban renewal funds, transportation funding for a local streetcar line, and other ingredients.

Cowan thinks the key is to unlock the hidden economic benefits of adaptive use, in combination with other forms of sustainable development, so that the projects become fully market driven. That requires finding and combining all potential revenue streams. “Our goal is to ensure that solid returns are generated from diverse sources,” he says.

The new emphasis on adaptive use is coming only partly from sustainability and economic development goals. A bigger factor is a tidal wave of demographic change, combined with changing spending habits. ULI’s Emerging Trends in Real Estate 2011 documents the trend: “Infill over fringe—the ‘move back in’ trend gains force as 20-something echo boomers want to experience more vibrant urban areas and aging baby boomer parents look for greater convenience in downscaled lifestyles.”

Those demographic forces, together with changing markets and continued tight credit, mean a seismic, perhaps permanent change in the development environment. “I don’t mean to be melodramatic,” says Knott, “but this environment is like when the dinosaurs got wiped out. If you don’t adapt, you’ll die.”

mehaffeyrenovate_7_300But he thinks these trends, coupled with government efforts to make inner-city redevelopment easier, bode well for adaptive use projects. “I think you’ll see a real focus on repurposing existing buildings over the next three years, especially with the need to focus on urban areas,” he says.

Marilee Utter, a specialist in public/private regeneration projects, thinks the current climate will encourage more developers to find smaller redevelopment and adaptive use projects to keep their companies busy. “Developers don’t want to stop, and necessity becomes the mother of invention. So you’re seeing a lot of very interesting small projects coming along.”

Utter has been working in Denver’s Lower Downtown (LoDo) historic district, where she says government spending is also spurring this small-scale development. She notes that the LoDo district is benefiting from public funding of the nearby Union Station redevelopment, an estimated $1 billion public/private mixed-use redevelopment of retail, residential, and office space around a transportation hub. In July, the project was also awarded $300 million in Department of Transportation stimulus financing.

Even with these incentives, the remaining challenges for adaptive use and renovation are formidable. Knott points out the serious problems that are sometimes uncovered late in adaptive use projects, making lenders even more wary than usual. And often it is now illegal to reconvert to mixed use a historic mixed-use project that has been reduced to a single use. “Building codes themselves have been for many years a huge impediment,” he says.

Governments seem increasingly motivated to remove these barriers, in part because of the job-creating potential and other economic benefits of adaptive use projects. Advocates point to the historic successes of projects like Vancouver’s Granville Island, an arts and market district where an initial public investment of just CDN$25 million now produces CDN$35 million in annual tax revenue alone—an eye-popping return of 140 percent. Add to that an estimated 2,500 new jobs, and CDN$130 million a year in additional economic activity.

mehaffeyrenovate_8_300While those kinds of returns are not often duplicated, research shows that such local economic activity does bring a bigger economic multiplier effect for the community. That effect can be especially powerful with adaptive use of historic buildings. Donovan Rypkema, a specialist in economic development with adaptive use, puts it this way: “As a rule of thumb, rehabilitation will be 60 to 70 percent labor, with the balance being materials. Once we install the sink, the sink doesn’t spend any more money. But the plumber gets a haircut, buys groceries, joins the YMCA—each activity recirculating that paycheck within the community.”

Rypkema also points out the green benefits of such employment. “Labor is a renewable resource consuming little in fossil fuel. Materials are often from nonrenewable resources and are nearly always significantly fossil fuel consumptive. A sustainable local economy should have local economic benefits that are widespread and measurable—and historic preservation provides both.”

Rypkema sums up the benefits this way: “It’s the ultimate in recycling.”