Part-Four: A Revival Built on Adaptive Reuse

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There are many euphemisms for the concept which holds something cannot be successful without first taking a risk. Without a doubt, adaptive reuse ventures within St. Louis’s urban core are looking to do just that – leverage a large initial commitment, both financial and logistical, into another piece of the City’s recent urban revival.

Select Multifamily Projects in City Outpace Their Peers

How are current adaptive reuse projects in the City stacking up against other areas of St. Louis? Consider the following developments and Figure 1 to see how redeveloping these assets for highest and best use is a worthwhile endeavor.

  • Woodward Lofts: Completed in 1926 and was a factory for the Woodward & Tiernan Printing Company (+$590 over Avg. Rent Per Unit (RPU) in City)
  • The Georgian: Former hospital administration building which has been out of service since 1987 (+$460 over Avg. RPU in City)
  • The Bordeaux: Built in 1910 to house the Zittlosen Manufacturing Company, the property later became the Crown Dress Factory and then the Bouras Mop Factory in 1961. The building became vacant around 2007 (+$271 over Avg. RPU in City)
  • Steelcote Lofts: Formerly the Steelcote Manufacturing Paint building which dates back to 1922, Pier Property Group’s redevelopments look to add much-needed density to the area (+$122 over Avg. RPU in City)

Figure 1: Asking Rent Per Unit by Market & Select Project. Source: CoStar

But given the strong potential for increased rental leverage through highest and best use conversions, why haven’t more adaptive reuse projects in the City been proposed? The answer tends to be that these projects have unforeseen hurdles that add a layer of complexity to any developers construction proposal. These complexities are not specific to construction cost, however. To put this in perspective, see the Figure 2 below which compares build out costs between adaptive reuse and new commercial office projects. Though adaptive reuse projects tend to be more variable in terms of final cost, both types of construction have similar cost outcomes when proper planning and risk assessment is combined with historic tax incentives (See Figure 2).

Figure 2: Estimated Construction Costs for New Construction versus Adaptive Reuse. Source: MGAC Study, Mid-Atlantic Region, Assumes Significant Updates for Adaptive Ruse

Though the discussion is not quite this simple, the numbers provide a baseline for the potential that urban revival holds from an investor’s perspective. Combined with improved infrastructure, 11 percent urban millennial demographic growth since 2010 and record levels of construction, an increasingly strong case for urban development is being made in St. Louis. These trends have not been lost on Pier Property Group (PPG) and its CEO Michael Hamburg, the developer responsible for a flurry of adaptive reuse multifamily and office projects in Midtown.

“As a native St. Louisian, the development from Downtown West through the Central West End is beyond exciting to see. Neighborhoods are being created or improved, new buildings are being constructed and much of our historic and vacant building stock is being absorbed. CORTEX, Washington University, and SLU are all going to continue to expand and be sustainable. The recent activity is just the beginning of a foundation to create a thriving Midtown region that reinvents St. Louis.”

With multiple adaptive reuse projects underway or proposed in Midtown, Hamburg is committed to this reinvention. Since PPG’s aforementioned Woodward Lofts redevelopment, the firm has begun construction on, or are in the planning phases of, four separate developments in Midtown. Three of which are adjacent and will create an expansive mixed-use campus anchored by Steelcote Lofts. This development includes high-end lofts that include a modern retail element and a micro-brewery. This campus, within a mile of the City Foundry and Armory and even closer to SSM’s new, $300m hospital, represents a turning point in the Midtown’s history as an gritty industrial neighborhood into a bustling commercial hub.

Office Redevelopment Offers Enhanced Rental Income Capture

Top-tier Class A asking rates across the City are as high as $31.0 psf, $11.6 psf higher than the average Class A rate in the same submarket. Interestingly, that spread is the second-highest of all St. Louis markets (see Figure 3). The City’s delta indicates that there is potential to unlock value in well-positioned office adaptive reuse projects in the urban core, provided that market dynamics remain consistent and the resulting product is appealing enough to tenants.

Figure 3: Spread between Top-Tier Market Rate and Class A Average, Source: Cushman & Wakefield

One current project that aims to capitalize on the ability to push rents higher is the Armory building in Midtown. Though a unique office project, it is not the first in the U.S., as some of the most successful adaptive reuse projects have taken similar form. Consider the below comparison between St. Louis’s Armory Project and the Spruce Goose Hanger in the Los Angeles metro, which emphasizes the potential for adaptive reuse to add game-changing office inventory to any market and provides anecdotal evidence that these developments can thrive in St. Louis.

The Spruce Goose development on the right shares striking similarities with the Armory in terms of open space, industrial appeal and eventual buildout. The former airplane hangar’s potential was noticed by none other than Google, who in 2018 signed a long-term, 320,000-sf lease. Given the intense demand for creative space in the U.S., it is no stretch of the imagination to expect similar successes in St. Louis, a market that has seen a surge in the start-up, technology and bio-tech industries on top of a considerable amount of commercial inventory that is primed for redevelopment.

As the Armory attracts large corporate users and other major mixed-use projects take shape across Midtown, look for developers and investors to follow suit.

Tune in next week for our final part of the series, A Future for Urban Revival. If interested in visualizing PPG’s developments along with the City Foundry, Armory developments and their master plans, check out EdgeView, Cushman & Wakefield’s interactive development tracker!

2019-10-23T10:31:13-05:00October 3rd, 2019|News & Insights|