Developers are replacing defunct malls and department stores with adaptive reuse projects to provide residential inventory.
Developers Looking to Cash In on Huge Demand
As demand for apartment living has soared, rents have exploded nationally. Realtor.com data verified that rents have jumped +17% y/y nationwide while rents in the Sun Belt have increased even more… +22% y/y.
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How have developers turned a scarcity of buildable land into growth-market projects? By adaptively reusing outdated movie theaters and department store malls with residential construction.
Suburbs & Cities Share Lack of Land Challenge in Face of Demand
Paul Doocy, co-head of financial consultancy CP Capital, is one advisor in the middle of growth-market reuse projects. Doocy said, “The infill suburban lots, the ones that are zoned and ready to go, are just gone.”
Steve Lehr, managing director of the CBRE Land Service, chimed in that cities share this challenge. According to Lehr, “Cities have prioritized office building over apartments and NIMBYism (not in my back yard) have squelched multifamily rezoning for years. Then, when the pandemic hit and renters converged on suburban space across the South and West, demand for rentals overwhelmed existing rental pipelines.”
According to Statista, multifamily construction starts across the country in 2021 hit a high not seen since the mid-1980’s. In 2021, nearly +17% more apartments came online than in 2019. Nearly one-third of those multifamily starts are concentrated in the Sun Belt region of the country.
Top Multifamily Markets to Watch
According to Yardi Matrix data, the Sun Belt continues to expand, driven by in-migration from gateway markets. This region is now home to roughly 50% of the nation’s population. The Sun Belt’s appeal? Lower living costs and a favorable tax environment.
Yardi’s data indicated that Sun Belt markets accounted for 31.5% of the country’s multifamily projects (280,500 units) now in the multifamily pipeline (890,868 units) as of September 2021.
The Urban Land Institute and PricewaterhouseCoopers’ annual ranking of the top multifamily markets to watch in 2022 are below:
Rank Market Units Underway
- Dallas-Ft. Worth 49,347
- Austin 38,489
- Phoenix 34,458
- Houston 28,841
- Los Angeles 28,479
- Orlando 22,010
- Miami 21,378
- Atlanta 21,160
- Tampa 18,847
- Charlotte 17,457
Recently Vacated Space Ripe for Investment
From 2020 to 2021, more than 13,000 retail stores in the US closed, according to Coresight Research data reported by CNBC. Some 750-anchor space in 1,000 malls tracked by Green Street emptied out. As of December 2021, one in ten movie theaters were shut down, according to Bloomberg.
Lehr with CBRE Land Service said, “You’ve got this decline in the best-use meeting up with the increase in rents and prices that people can afford to pay for multifamily lots. So, the (adaptive reuse) trend is not purely a function of multifamily expansion; it has something to do with retail’s contraction.”
Advisors and Developers Look for Previously Populated Buildings in Attractive Locations
Malls are great candidates for apartment projects. Why? They’re often in busy neighborhoods, close to jobs and relatively easy to build on. Doocy said that malls, unlike farm fields or former gas stations, are likely to not have subsurface contamination. “You probably have a nice slab” to work with…”a site that’s not going to have any (or many) problems.”
From the suburbs of Los Angeles to Phoenix to Atlanta, outdated, unused malls are getting this adaptive reuse rental treatment and developers are going for mixed use, live-work-play, projects.
According to the CCIM Institute forecast, the redevelopment of retail centers and malls may be the “most impactful trend” from 2021 through 2025. Three of the five states expected to see the greatest adaptive reuse trend are Florida, California and Texas.
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