Can Multifamily Commercial Properties Cope With COVID-19?

Multifamily properties are not merely for residential purposes. Many of these real estate assets are developed to include other components like hotels and retail. However, with the COVID-19 pandemic hurling new challenges in the commercial real estate industry, investors have to look at this asset class from a fresh perspective to remain competitive. The pandemic has accelerated a property redevelopment trend. Low-rise office buildings and single-story retail centers are being repurposed and renovated to increase asset density. New opportunities are expected as retailers close their stores—and those who can act fast will benefit the most.

Even before the public health crisis, the practice of repurposing underperforming malls into multifamily properties was already prominent. Historically, problems with repurposing and mall renovations revolved around lengthy leases and leases ending at different times. A piecemeal approach would have been essential. However, the pandemic is likely to speed up retailers’ decision to give up earlier than usual, leading to premature lease termination. This could mean more opportunities to think big and do a wide-scale master planning related to entire mall sites.

How Multifamily Properties are Coping?

The ease and convenience of 24/7 online shopping was already a big challenge that malls had to deal with before social distancing was the norm. However, now, they also have to deal with closures caused by the pandemic. To enhance long-term success for the property and stay ahead, some CRE investors are considering the addition of multifamily components to their malls.

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Centennial Real Estate Co. proposed a 300-unit luxury multifamily apartment to the Connecticut Post Mall in New Jersey. Senior vice president of development Jon Meshel said that it is their first step to revitalize the property. If they do not do anything, the business could fall into trouble.

Adding offices is another way to keep commercial properties relevant during COVID-19. However, research conducted by Centennial found that housing is a better way to reinvent properties like malls. Of course, before you transform a mall to accommodate residential and/or office units, you will need to address zoning issues and community concerns.

Besides Connecticut Post Mall, Hawthorn Mall in Illinois is also being considered by Centennial for redevelopment. Should the high-end property be redeveloped, it will include an upscale multifamily component. The plan was announced way before COVID, in March 2019, and designed by KTGY Architecture. According to the plan, the 47-year old 1.3-million-square-foot super-regional mall will expand to accommodate an upscale grocery, new dining options, and retail establishments.

Alderwood, an aging retail property, is another example that is being revitalized with a multifamily component. Measuring 1.3 million square feet, the retail center in the Seattle suburb of Lynwood, Washington, is being improved with help from AvalonBay Communities to provide 328 units and a 64,000 square feet commercial space first floor.

Think Big!

Lengthy leases and varying end dates for leases have historically caused many problems in mall repurposing or renovation. However, if COVID-19 causes retailers to leave their units and terminate their leases earlier, that should provide a more significant opportunity to redevelop the entire property and conduct larger-scale master planning.

It is not uncommon in real estate to transform industrial and office properties into multifamily properties. However, a mall comes with unique issues that can make it challenging to repurpose into a multifamily structure.

The most common problems are attributed to factors like the property dimensions, access to natural light, and the HVAC and plumbing infrastructure. They could get in the way as the commercial property is reimagined into an entirely new and different property type. In most cases, demolition may be needed, and a new building must be built from scratch. The land gets the opportunity to be reinvented instead of the structure.

In obsolete malls, it usually makes more sense to demolish them to give way to a new multifamily property from the ground up. That does not mean developers and real estate professionals cannot be creative and make them unusually unique places to dwell. It is just that saving those properties could take more work than what they are worth. It might be costly and impractical to use the old structure to create appropriately shaped and sized residential units, provide the right infrastructure, and build attractive and convenient parking solutions.

Consolidating garage parking and developing a multifamily property on a freed-up site is a common trend. Sometimes, larger anchors are demolished to be replaced with housing.

Evaluating the Project

Yaromir Steiner, Steiner + Associates’ founder, and CEO says that each mall has its unique circumstance. If the mall is set in a potentially attractive residential development area and retail is defunct or doing poorly, the site has more value than the building. There are projects where a mall is merely unsustainable, resulting in it being progressively demolished and giving way to a residential neighborhood.

Many multifamily units can be placed initially on five acres or 10 acres—something that can be done in a minimally disruptive and economically feasible way. Residential aspects of the property can be put in phases as the mall is vacated progressively and demolished eventually.

Matching the project with the location is also important. For instance, high-rise condominiums are appropriate in Fort Lauderdale or Miami, while rental units may be more appropriate in Kansas to cater to its millennial residents.

The Bottom Line

We have yet to fully realize the extent that under-performing malls can do to curb the shortage in affordable housing, which greatly increased because of the pandemic. Even developers who think that shopping centers should not be targeted to provide affordable housing expect to see affordable units being blended into apartment buildings, whether in prime locations or revitalized malls.

Should you want to involve yourself in a multifamily commercial project, Capital Investors Direct can help you get the custom financing solution for it. We are a commercial real estate investment advisory firm with extensive experience in financing commercial real estate projects of every size.

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