As demand for value-add projects rises, so does the demand for experienced general contractors

Approximately 998 million square feet of office real estate is available throughout the United States.

Which begs the question: How much of this can realistically be turned into housing?

The answer might partly be found in a recent RentCafe.com analysis of data from Yardi Matrix, which shows that adaptive reuse apartments are expected to grow by an impressive amount in the next few years. Already, 122,000 rental apartments are currently undergoing conversion—45,000 of them through office repurposing. Here are some other findings:

• 10,090 apartments were converted in 2022. In the same timeframe, the number of office conversions experienced a 15% slowdown, resulting in the retrofit of 3,390 apartments.
• Former hotel redevelopment surged significantly at a record-breaking 43% increase, transforming into 2,954 apartments.
• The future of adaptive reuse projects looks promising, with a projected 63% increase in upcoming projects.
• Los Angeles remains a prominent hub for adaptive reuse, with notable projects also emerging in New York City and Chicago.²
• 70% of the units in Chicago's pipeline for conversions will be repurposed office spaces.³

Additionally, redevelopment and reuse of shopping malls will be the most active asset class in 2023, predicts real estate advisory firm StoneCreek Partners, which identified more than 150 malls across North America that either have been redeveloped in recent years or are in the works, with retail-to-residential conversions leading the way.⁴

These trends represent a growing need for general contractors specializing in value-add construction. Projects range from something as simple as interior apartment unit upgrades to as complex as conversion of a high-rise building or a suburban mall from one kind of use to another—all with the goal of increasing an asset’s value. They each come with their own set of unique and oftentimes unforeseen challenges. And they require a general contractor with experience.

Value-add construction—a Focus specialty

Focus, a Chicago-based developer and general contractor, has been partnering with developers pursuing value-add projects for more than 30 years. The company has built a diverse portfolio, approaching each project with an owner’s mindset, meaning that they factor an owner’s concerns, such as lease-up timelines, into their own standard operating procedures.

Moreover, Focus prides itself in owning the unforeseen, meaning the construction team thoroughly investigates a building or site to correctly price a project before any work begins. And if the company uncovers a potential problem or roadblock, they come up with a solution that’s in the best interests of the owner. In fact, anticipating and planning for the unknown is among a number of best practices Focus has established over time and applies to every value-add project the company takes on, including:

• Careful sequencing and detailed logistics, especially on active sites—for example, apartment buildings that remain occupied and malls that are still open to shoppers.
• Surgical demolition—that is, tearing down portions of an active mall or removing segments of a high-rise structure carefully to ensure the safety of everyone on the job site, including in some cases tenants or shoppers.
• Close collaboration with subcontractors, who likewise have experience in value-add projects, oftentimes as early as the preconstruction phase.
• The ability to be nimble when working through a complete renovation, where conditions onsite may vary from floor to floor or unit to unit.
• Addressment of structural damage found during demolition prior to making any improvements as teams work to maintain budget and schedule simultaneously.

Best practices in action

How this all translates on the actual job site is illustrated in the following highlights of value-add projects included in the Focus portfolio:

1926 West Harrison

Renovating an older building that no longer serves its original purpose and requires repair work beyond your typical aesthetic upgrades may be the most extensive type of value-add work. Such was the case at 1926 West Harrison, a 1960s high-rise building in Chicago’s Medical District that Marquette Companies was looking to overhaul.

• The building featured a unique combination of exterior precast panels and interior poured-in-place floors and columns, and the plan was to remove portions of the precast and replace them with new floor to ceiling windows. But, as is often the case, not everything went as planned. In ripping off the panels, which sandwiched the building’s insulation, they began to pull apart. Further exploration revealed that almost all the panels were affected.
• The issue required fast thinking. One solution could have been full-height glass, but that was expensive. Instead, Focus came up with a way to mimic the original design using exterior drywall and stucco that was a fraction of the cost while preserving the owner’s desired aesthetic. What would have meant $6 million in unforeseen costs to the owner ended up at only $2 million.

Hawthorn Mall

Converting part of a mall into a mixed-used development without closing it to shoppers requires careful planning and some tricky maneuvering. At Hawthorn Mall in Vernon Hills, IL, Centennial was looking to transform the former Sears and Carson’s parcels to make way for a luxury community that in addition to residential, offers best-in-class amenities and the walkability of an urban environment. The plan included turning the mall’s inline retail spaces outward to face a park.

As part of a complex project plan, Focus pre-purchased all wood products and secured materials and fixtures that could potentially be in short supply in the preconstruction phase, storing them offsite or with the manufacturer to keep the multi-phased project on track and costs predictable. Material delays associated with electrical service equipment posed a particular challenge, which Focus addressed by distributing temporary power to approximately 100 units—enough to temper completed units throughout the winter and enable workers to finish other units so that there would be no delays in turnover.

“The mindfulness of the (Focus construction) team when sequencing work stands out to me as an advantage,” says Vic Howell, Senior Development Manager for the Hawthorn Redevelopment. “Focus construction can anticipate preferred turnover of specific areas of the building, provide solutions, and prioritize certain work to get the owner what they need when it makes the most sense. This is especially helpful when it comes to supply chain issues and unforeseen conditions as they can come up with options to present rather than being spoon-fed direction. That ties to the ability to think like an owner and make decisions on the fly that benefit the end user but may not have been specifically called out in the contract documents.”

Evanston Place

Revitalizing existing apartment assets can improve rental rates, yet the construction process can pose unique challenges—from inflexible schedules driven by lease expirations and market seasonality to working around occupied units and common areas. At Evanston Place Apartments, a multifamily development in downtown Evanston that houses Northwestern University students, owner AIMCO was looking for 190 units in two nine-story buildings to be updated while its residents were off campus for summer break.

Unit updates included installing all new cabinets and countertops in the kitchens and bathrooms, appliances, plumbing fixtures, showers, door hardware, light fixtures, flooring, and window blinds. Teams also scraped the popcorn ceilings, skim coated them and applied new paint throughout. To complete at least one unit per day, the Focus construction team took several measures in advance:

• Before start of construction, teams completed the full scope of improvements on two units during the winter as a test to determine what would be required to convert one unit a day.
• The team field measured all spaces in the days leading up to construction, enabling trade partners to pre-order all necessary materials stored in a nearby warehouse.
• In awarding contracts to trade partners, Focus negotiated a 6-day work week upfront and created overlapping trade schedules to shorten the construction timeline and minimize extraneous labor costs.

In just eight weeks, Focus construction renovated all 52 units, enabling the client to market and lease the new units in time for fall semester.

SCIO

Renovating an occupied building complicates the standard construction process, typically extending the construction schedule to accommodate for other considerations and fewer working hours. Work must be scheduled well in advance, as quiet as possible, clean, and done outside typical working hours so that it’s least disturbing tenants. Thus were the challenges Focus faced in redeveloping SCIO, an apartment project located on Ashland Avenue in Chicago’s Medical District. In addition to upgrading apartment units in two 12-story towers, Focus built a new amenity pavilion that connects the two.

To best manage this, the Focus construction staff was in constant communication with the property management team to ensure those living in the building were kept informed about construction progress and the schedule for completion.

Teams established procedures for moving through the building systematically, working in certain sections of the building that were vacant or less occupied than others. All construction was structured in phases. Working from the top floor down, the Focus team renovated one floor, or 18 units, every eight weeks with a short overlap between floors. Only two floors were ever under construction at a time, minimizing the impact on tenants. Also, a separate construction entrance helped prevent tenants and construction staff from running into one another.

All the renovation and construction work were executed in such a way that the building was able to maintain occupancy and the property management team could actively lease the newly renovated spaces as they became available.

“It takes a unique approach and a dedication to do right by the owner to deliver successful value-add construction projects,” says Focus CEO Tim Anderson. “It is critical to have a builder who cares about your outcomes as much as their own because the nature of redevelopment is improvement, and inherently, you have to discover problems in order to develop valuable solutions.”

To learn more about Focus’s value-add work at these properties or to discuss your value-add project, please reach to us out today.

Sources:

1 Goldberg, E. (2022, December 27) What Would It Take to Turn More Offices Into Housing? The New York Times https://www.nytimes.com/2022/12/27/business/what-would-it-take-to-turn-more-offices-into-housing.html

2 Neculae, A. (2023, July 24) Apartments From Adaptive Reuse Projects to Exceed 120,000 in Upcoming Years, Despite Recent Slowdown in Office Conversions. RentCafe.com. https://www.rentcafe.com/blog/rental-market/market-snapshots/adaptive-reuse-apartments/

3 Sparber, S. (2023, August 12) Chicago will lead office-to-apartment flips, report says. Axios Chicago. https://www.axios.com/local/chicago/2023/08/12/office-to-apartment-conversions

4 Kiger, P.J. (2023, February 27) Turning Malls into Neighborhoods. Urbanland. https://urbanland.uli.org/economy-markets-trends/turning-malls-into-neighborhoods/