Q&A with Bill Hardie, president of Keystone Construction Company
As the pandemic took hold, retailers shed underperforming stores at an unprecedented rate. In 2019 and 2020, more than 18,500 retail locations nationwide shut their doors. Though 2021 was a much healthier year with store openings nearly equalling store closures, there wasn’t a net gain from the retail sector to refill those recently vacant spaces.
Very literally, when one door closes another opens. To survive, owners of shopping centers are reducing rent rates. Healthy industries like medical, self-storage, fitness and professional services are taking note of the new financial feasibility to locate in geographically desirable, high-traffic locations in place of vacant retail stores.
Businesses looking to purchase can commonly buy and convert a shell at half of the cost of building a brand new location. Given the current state of double-digit construction inflation and shortage of materials, repurposing an existing building is even more of a luring alternative to building from the ground up.
St. Louis-based Keystone Construction Company leads design/build projects to repurpose former retail spaces in addition to niches in new retail, office, medical and industrial construction. Keystone has converted individual big box retail locations to self-storage facilities and commercial office spaces and is the general contractor for the redevelopment of an outlet mall in Chesterfield, Missouri into a unique entertainment complex called The District.
In this Q&A, Keystone president Bill Hardie shares his insight into the trends, opportunities and challenges of repurposing vacant retail spaces.
MWM: From your perspective as a general contractor, what are the benefits to the owner of redeveloping a vacant space versus building the same facility from the ground up?
BH: There are a couple of major benefits to reusing an existing facility. First of all, a large-scale vacant facility typically is going to sell for a dramatically reduced price. Developers will buy these vacant buildings for less than 50 percent of the replacement cost for new construction. So, instantly they have financial gain. And, probably equally as important, they've already got a structure that is ready to be transformed into its new purpose. So, the delivery time is cut in half or more because you already have the structure in place. You don't have to design it, you don't have to go through the construction and permitting processes for the shell. You just need to transform it. So, there is a financial gain and a timeline delivery gain.
MWM: What are the challenges to redeveloping a vacant retail building into a new use?
BH: Ultimately, it comes down to a few factors. What is the existing building? What is the new use? And, what do you have to accomplish to make those two work together?
It really comes down to the infrastructure that is in place. Is it suitable for your new use? Is the electrical system large enough? Are the mechanical systems reusable or do they have to be scrapped? Do you have to start from scratch with systems like plumbing?
Other factors are the clear height of the structure. Does the clear height give you enough space to accommodate what you want to accomplish with the new use? Truck access is another aspect that typically comes up. The new facility may need a lot more delivery truck docks. Do you have to add those? These are all infrastructure challenges that we run into frequently
In addition, these properties had zoning in place for the previous tenant. A lot of times you are coming in with a completely different use, so you may have to go back to the city to get alterations to that zoning?
MWM: If a company is choosing between converting an existing building or tearing a vacant building down and rebuilding it from scratch, how much will be saved with the renovation option?
BH: Demolition is really economical, so it comes down to the difference in price from reusing an existing building versus building one from scratch — the cost of building a new shell versus the cost to reuse the existing shell. The value of that savings depends on how economically the buyer purchased the existing property. I know of instances where a vacant big-box shell sitting on a piece of land sold for $10 per square foot. To replicate that building shell with a brand new shell would have ranged from $70 to $90 per square foot. So there can be dramatic savings. It's quite likely that you could buy a property for 50% less than replacement costs. It really is significant.
MWM: Do you find working with the municipalities on permitting for projects like this easier since they may not like having vacant buildings in their city?
BH: That varies. Cities may resist certain types of new uses for buildings if there is no longer going to be a sales tax associated with it. They also consider what the nearby residents think. There are potential challenges on renovation projects with residents and the city, who are used to what the facility used to be. They may need to be convinced about using the vacant building in a different fashion.
MWM: What trends are you seeing in the type of businesses going into vacant spaces within retail centers or strip malls?
BH: As the original high-rent paying tenants have gone away or gone elsewhere, different business types have the opportunity for space at a lower rate. For instance, sports and fitness facilities are taking over larger blocks of empty retail space. These former retail spaces work well for medical and professional services businesses because they are typically in areas of dense population, very easy to get to, and they have a lot of traffic going by them. They are great locations for a lot of types of uses.
MWM: How has the pandemic impacted trends related to the reuse of retail space?
BH: What we have gone through in the last couple of years has certainly accelerated a lot of changes in the availability of space. Overall, the demand for space is up in some sectors while spaces are being abandoned in others. If the work-from-home trend continues, the availability of office space to be reused for something else will continue.
If the economy continues to grow, the need for space will continue — there is new construction all over the place in St. Louis. Whether or not it continues at the same pace or will become even greater is a little bit difficult to know now.
In addition, because of the dramatic increases in construction costs since the pandemic, reusing vacated spaces makes more sense now than ever. To replicate an existing space today is much more expensive than it would have been a few years ago, which makes that vacant space more attractive to a potential buyer. Secondly, construction timelines have stretched out because of materials shortage. So, if you have a vacant building that a business can make work with some alterations, it will take a lot less time than to build a new building.
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Bill Hardie is the Founder and President of Keystone Construction Company, a St. Louis-based general contractor with expertise in design/build projects for office, retail, industrial and healthcare clients. For nearly 35 years, Keystone projects have reflected the company’s commitment to superior architecture and design, quality materials and craftsmanship that stand the test of time.
Bill has extensive experience in architecture, civil engineering and construction. He and Keystone co-founder John Hardie developed a design/build system that provides a format to explore creative ways to get the best final product for less. Harvard University chose this unique process for a course study called "How to do Design/Build Right." For more information about Keystone Construction Company, visit https://keystone-stl.com.
Feature Photo rights/courtesy of Keystone Construction Company.