Cost Control Critical To Making Adaptive Reuse In Gentrifying Areas Less 'Scary'

Philippe Pellerin started buying up commercial bakery buildings and ink manufacturing plants in Grant Park nearly a decade ago, knowing that he wanted to develop spaces for local mom-and-pop businesses that were clamoring for space but didn’t have any.

Pellerin, the founding principal of Pellerin Real Estate, spent $30M transforming the old industrial buildings into The Beacon, and filled his spaces with mom-and-pop and local business operators, including Oxfit, Elsewhere Brewing, Patria Cocina and A Haute Cookie. Pellerin said had he torn down the properties and developed from scratch, his costs would have been twice as much, putting rents out of reach for local retailers.

“What [adaptive reuse] allowed us to do is keep our rents lower and make the spaces more attainable for less-established or experienced business operators,” Pellerin said. “If we could keep our prices low, we were competing for tenants with Krog Street and Ponce City Market, but our rents were half those.”

Pellerin was a panelist at Bisnow's Atlanta Adaptive Reuse & Repositioning event last week, where he and other local developers said the ability to keep costs lower helps keep local companies in the market while also not impacting property values as much, which could lead to displacement of longtime residents in historic neighborhoods throughout the city.

“My thesis is less of an investment thesis. It’s more of a social thesis, and it’s more about the net wealth effect. I noticed that a lot of people of color who owned businesses, often their landlords were not super compassionate about their condition and their lack of access to capital and all that type of stuff,” Seryus Managing Principal Scott Young said at the event, which was held at the Hyatt Regency Atlanta. “But when business owners are richer, it tends to be sort of a halo effect on the entire community.”

When adaptive reuse works best, a project can financially elevate many of the businesses in that community instead of pricing them out, Young said. As a developer, he said he is sensitive to the concerns of local businesses and residents. Even if local businesses aren't likely to locate in the new project, rents going up in one development tends to encourage neighboring landlords to push their rents up as well, panelists said.

“Business owners really want to integrate themselves and be a part of the revitalization of this neighborhood. That makes a difference and a big part of that is reusing what’s there and not just scraping, because that’s scary for people,” said Melissa Ahrendt, the executive director at Stafford Properties, which is transforming a former bakery and a former brick factory into the 45K SF mixed-use Terminal South project just off the Atlanta BeltLine in the Peoplestown neighborhood. 

Since the end of the Great Recession, as people returned to urban settings, neighborhood activists and Atlanta officials have been trying to manage the impact of gentrification. But that transformation in neighborhoods like the Old Fourth Ward, Westside Atlanta, Summerhill and along Memorial Drive has had the effect of pushing up property values.

"We are already in a very quickly gentrifying neighborhood," Ahrendt said. "There’s already a lot of fear."

According to a 2017 Urban Displacement Project study, 80,000 low-income households in Atlanta were residing in neighborhoods where they were at risk of being displaced due to rising costs and land values.

“Anytime gentrification is in play, legacy residents are, rightfully so, concerned that their taxes are going up, rents are going up and they’re being pushed out of their neighborhoods," Ahrendt told Bisnow in a follow-up interview after the event.

Young said developers risk causing more harm to a neighborhood than good by not reusing as much as possible of an existing building and being aware of a project’s impact on its neighbors.

“I think the companies that don’t pay enough attention to the DNA of a neighborhood have the most difficult time,” Young said. 

Ricardo De Rojas, an executive director at The Ardent Cos., which owns Piedmont Center in Buckhead and is adding retail to the wooded office enclave, said neighbors can complicate things by asking to include a multitude of uses, some of which won’t work on a project.

Navigating local meetings requires developers “to work your magic and to be able to sell that story,” De Rojas said.

“It’s really about building trust,” Ahrendt added. "You have a lot of developers who come in and promise a lot because they need you to approve whatever variance you need approved. It’s about building up trust and keep showing up. And you keep listening and you actually don’t promise them things that you know you’re not going to be able to do.”

Construction costs are a key factor in ensuring a project doesn’t outstrip the overall neighborhood’s affordability, panelists said. On average, reusing an existing structure for a new project runs around 16% less than new construction and can take 18% less time, according to a 2017 Deloitte adaptive reuse study.

Construction firms often champion a teardown, Pellerin said. On an adaptive reuse project in Grant Park, Pellerin said he struggled to find a contractor that didn’t recommend demolition followed by ground-up construction. But when he found partners who understood, the net costs on the project shrank from $1M to $300K, he said. 

“When you talk to any contractor, and you tell them that you want to adaptively reuse this building, pretty much every single contractor’s gonna say, ‘Scrape it and, let's start over. It's gonna be cheaper, faster, better, easier.’ And then your basis is going to be a lot higher,” Pellerin said. 

Costs can complicate developers financing for adaptive reuse projects, Stonehill Strategic Capital President Daniel Siegel said, adding that while keeping budgets tight, developers should beef up interest reserves to handle unexpected complications when retrofitting a building.

“Give yourself the extra time to make sure it works because, in most of these projects that we’ve been involved in, there’s always something that comes along when you get into the walls that are unexpected,” Siegel said. 

Proposing to add office into adaptive reuse projects, Siegel said, is often a tactic commercial real estate brokers use “who are trying to drive the pricing.” Developers, he said, may find it difficult to land financing when office is included due to elevated costs.

“We have no problem with the business plan and will definitely finance it. But the number of times where we found that people have actually totally vetted out the cost of it is minimal,” he said.