There’s Redevelopment Gold In The Larger Stock Of Former Manufacturing Space In Smaller Markets
Tucked away in small cities and towns nationwide is an aging manufacturing infrastructure made of old factories and other buildings that mostly date from the post-WWII industrial boom. These buildings vary in size, composition and use – some are still in use, while many others derelict or underused – but they are increasingly being recognized by the commercial real estate industry for their redevelopment potential, according to industrial property specialists.
“There’s great interest in these sites now, both from manufacturing users, as well as value-added investors who previously shied away from secondary and tertiary markets,” says Newmark Senior Managing Director Thomas W. Turner, SIOR, in the company’s Charlotte office. “For manufacturing facilities that don't have a great deal of functional obsolescence to them, there's a huge demand.”
The total redevelopment potential of all the older manufacturing facilities in all the small markets nationwide may not be precisely clear, but even so the stock is large. JLL reported in February that one reason that demand for new manufacturing space is so great is that so much of existing space is so old: 52 percent of existing inventory is from 30 to 60 years old.
Redevelopment Challenges Unlike Any Other Sector
Even though the industry is recognizing the opportunity, that doesn’t make it easy. Unlike warehouses or logistic facilities, manufacturing facilities tend to be highly individualized, meaning that redevelopment of each facility has its own set of challenges, along with hyperlocal market considerations.
“It’s nearly impossible to state what works best,” says Evoke Partners CEO Geoffrey Kasselman, SIOR, based in Chicago, referring to manufacturing space redevelopment. “Everything is on a case-by-case basis.”
Kasselman points out that considerations may include -- but are hardly limited to -- market studies to determine what is most needed, feasibility analyses, community master planning, zoning considerations, utility dynamics, market trends, market timing, labor dynamics, area amenities, access to and cost of capital, and an exit strategy.
Complicating matters is that some former manufacturing facilites have no feasible new use, and even a complete tear down in some instances can be problematic, considering demolition and remediation costs. While there may be a lot of wheat in this emerging market, in other words, there is a fair amount of chaff as well.
“Facilities with a high of functional obsolensence -- whether they have two stories, multi-buildouts, lower ceiling heights, or constrained columns –are not ideal for a user, nor, candidly, in these tertiary markets, for a value-add investor either,” Turner says.
The cost of redevelopment, in other words, can’t always be made to work.
“Many buildings likely became obsolete for a reason,” agrees Colliers’ Tim Breckner, SIOR, who is senior vice president in the Cleveland Industrial Services Group. “There's a lot of challenges with doing this type of conversion. For example, maybe there's minimal truck access on these properties. A lot of trucks used to be smaller, and these buildings are located in neighborhoods, so modern truck access would be challenging.”
For manufacturing facilities that don't have a great deal of functional obsolescence to them, there's a huge demand
Still, the demand is there, and often enough, after careful assessments are made, the redevelopments can pencil. Specialists in the field are emerging to take on its various challenges, according to John Wilson, SIOR, founder of Balanced-View in London, which has worked on redevelopment projects in the United States.
“You need a well-financed developer who understands those markets, and there are more of them coming forward now,” Wilson says. “I suppose, in a way, the market ultimately will be finite, but actually we're finding product all the time.”
Wilson further posits that independent private developers, as opposed to larger companies that answer to shareholders on a quarterly schedule, probably have the edge in redeveloping older manufacturing product. For one reason, they might know their markets in the kind of granular detail necessary to make such a deal work. There is also the matter of timing. Due to the complexity of some of the redevelopments, they might stretch into two- or three-year projects, perhaps longer than some companies care to pursue.
A Mixed-Use Goal
Like the challenges involved, the goals of manufacturing redevelopment are varied, Kasselman notes. In some cases, mixed-use redevelopment away from manufacturing might make the most sense. There have also been instances where large obsolete manufacturing facilities have been partly demolished but also partly redeveloped into smaller multi-tenant industrial properties or incubators. In yet other cases, full demolition in favor of new construction for an industrial use, and not necessarily manufacturing, may prevail.
Perhaps the most ambitious kind of redevelopment is into mixed-use, which is not only physically complex, but also tends to have a lot of local stakeholders.
“Our approach is that we work with the local zoning authority, the planning guys, local government and others, and we say, what do you really want? What do you want locally?” Wilson says.
The company has undertaken the redevelopment of nearly 10 acres of former tobacco factories and warehouses, some parts of which are more than 130 years old, in downtown Clarksville, Tennessee. The most historic structures will be repurposed, other buildings demolished, and new structures built, in an overall effort to create a mix of residential and office space, along with retail, green space, parks and walkability.
The original footprint was about 250,000 square feet of the old factory space, Wilson says. The final plans for the CBD mixed-use scheme came in at about a million square feet, which received approvals from the city last year. While the process was complex, motivated stakeholders – city officials, property seller Reynolds American, and community groups, all of whom were eager to see redevelopment – made it relatively smooth, he notes.
Partial and Complete Demolition
Other times, redevelopment means at least part demolition, typically on a smaller scale. That was the case in the conversion of a 95,000-square-foot former injection molding site in Jackson, Mississippi, according to CBRE First Vice President Grant Ridgway, SIOR, who is based in Jackson, and whose company represented a client who bought the property out of bankruptcy. Shortly after acquisition, the building was hit hard by vandals removing the copper, plastic injection molding equipment, giant water pumps, and more.
“The owner took an insurance claim and asked us to sell it as is, so we did,” Ridgway said.
“We sold it to another client who elected to turn it into a multi-tenant, small-ish bay distribution center. We knew the market was tight in the 20,000 square foot to 40,000 square foot range, and that we could break the building up into three suites quickly.”
The new owner demolished the interior, updated the lighting, built the necessary walls, and CRBE leased it, explained Ridgway. Once the property was leased, it was sold again for the third time to an investor looking for a stabilized asset.
In Las Vegas, a property originally developed for a pharmaceutical manufacturing company was recently redeveloped into distribution space, according to LOGIC Commercial Real Estate Partner Amy Ogden, SIOR, a locally based industrial and logistics specialist. The 1990s-vintage two-story building totaled about 215,000 square feet on 12 acres in the airport submarket.
“The second story, about 60,000 square feet, had a four-inch concrete slab, which is very thick for a second story, and the floor was fit out with all kinds of clean rooms, and the ventilation was extremely complicated,” Ogden says. “Basically, we had to dumb it down to make it generic distribution, so that's what we did, essentially by taking out the second story.”
It was an expensive undertaking, but local market conditions made it worth the expense, since there is very little industrial space in the Las Vegas airport submarket, Ogden explains. What was left was a 142,000 square foot facility with brand-new office space sitting on seven acres – meaning the other five acres could be developed as well.
Straight-up demolition of a former manufacturing site is sometimes the answer, says Savills’ Michael Royce, SIOR, who is a corporate managing director in Savills suburban Washington, D.C. office. Some years ago, he worked on a deal that involved Duke Realty acquiring a former GM automobile plant in Baltimore, Md. Duke demolished the sizable plant, engaged with local officials and Cushman & Wakefield (Royce was the leader of the industrial group for C&W at the time), and in about two years had developed nearly 2.5 million square feet of distribution space adjacent to the Port of Baltimore.
The Lure of Electricity
One thing that older manufacturing spaces sometimes have that is very much in demand now is access to large amounts of power. That fact has facilitated ongoing redevelopment of old factories into data centers, for one thing, and has for some years – such as the conversion of the former R.R. Donnelley & Sons printing factory in Chicago into the Lakeside Technology Center data center, one of the largest in the world, around the turn of the 21st century.
Power was a key consideration for the redevelopment of an older manufacturing facility in Bedford Park, Ill., not far from Midway International Airport, where Evoke Partners is planning to convert an older manufacturing facility with heavy power into an EV fleet charging center for commercial vehicles, according to Kasselman.
The same was true for a 150,000-square-foot building on the west side of Cleveland, a legacy manufacturing complex, says Breckner. “This particular building had really good metrics for us for what we're talking about. Specifically, it had over 8,000 amps on site. Our client makes strapping material, which requires a lot of power, and they couldn’t wait 24 months for a power upgrade, so they leased the building.”
In other cases, Royce notes, while the industrial strength utility connections were not needed by the new occupant, so a novel strategy was formulated that didn’t involve simply tearing down the building.
“The former Illinois Tool Works in Baltimore was a tool and die plant for 30 years,” Royce said. “ITW had done very little to decommission the site, and at the time of the sale the property was serviced by oversized gas, water, sewer, and electricity well beyond the needs of the buyer.”
Savills worked with the buyer and a local developer to release the electrical services to the residential community in and around the property, which allowed for the upgrade of its elementary, middle and high schools, to serve the growing student population. The Sparrows Point Golf Course was also able to use the excess water service to install a new sprinkler system for the course and expand the clubhouse.
A similar transfer took place, Royce recalls, with the redevelopment of a former cold storage warehouse in Baltimore into more standard warehouse space. In that case, the buyer worked with the regional power supply company to release the no longer needed utility service to power a nearby residential development and small retail center, which were completely occupied with a year.
“Some of these buildings have really heavy power, and that's an item that has become a lot more important today,” Breckner says. “If you need a significant power upgrade, you might be looking at 16 months plus to get equipment and power into a building. But a building that already has that has a major advantage.”
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