While Midwestern cities like Chicago, Detroit, Cleveland, Cincinnati, Minneapolis and Kansas City are hotbeds of historic conversion activity, the trend is truly national in scope–and continues picking up momentum. From hotels and office buildings to manufacturing plants and warehouse facilities, the range of historic renovation possibilities is diverse. The growing popularity and prevalence of historic renovations and residential conversions can be attributed to a range of factors.

Among the most important is the character of the building, and the one-of-a-kind spaces and design elements that add distinctive style and experiential dynamism in common areas and individual units. That character qualifies as an amenity in and of itself. Another advantage is geographic: historic properties frequently occupy coveted central business district locations that would be prohibitively expensive or otherwise unavailable. They also tend to have outstanding view corridors (which are unlikely to be compromised by future construction) and have high walkability scores. The thick walls and floors often found in historic properties create better sound reduction between apartments, and lead to lower utility consumption. Original masonry construction also accommodates rooftop amenities like swimming pools, clubhouses, restaurants and bars–the signature amenities that are cited as the deciding factor in a customer's decision to rent.

As an example, renovations at our 800 Tower City Apartments in Louisville transformed an outdated 1960s landmark high-rise into a compelling 286-unit mixed-use tower. We invested more than $12 million in creating studios to penthouses, reimagining the lobby and common areas, upgrading technology and mechanical systems and introducing 24/7 concierge services, a rooftop Sky Club, Sky Park with pool, Bark Park, gourmet outdoor kitchen and Zen Garden. We also opened first-to-market restaurant, Bar Vetti, on the ground floor with outdoor dining.

Our recently completed City Club Apartments CBD Cincinnati sits on the site of The Burnet House hotel, known for hosting President-elect Lincoln on his inaugural journey to Washington DC. The hotel was unfortunately demolished in 1926 and replaced in 1928 with a 300,000-square-foot office building. We purchased that building in 2016 and converted it to 294 apartments and penthouses, 45,000 square feet of first floor retail space, including a gourmet market and café and the first rooftop restaurant in downtown Cincinnati.

The historic conversion trend also dovetails with the growing popular preference for green, wellness and environmentally responsible planning and design. No matter how environmentally responsible the construction of a new building is, it's never as green as restoring, renovating and repositioning a historic structure. We are also seeing historic conversion incentives from the lending world. Freddie and Fannie are providing better interest rates for thoughtful green projects, and city, state and federal governments are requiring/imposing more stringent sustainability mandates while simultaneously offering greater incentives for renovating historic buildings. There is a growing national consciousness around reuse and there are few who would argue the societal benefits.

On a fundamental level, people care about preserving important buildings. These structures are more than just a brick-and-mortar relic–they are important, often iconic touchstones in the civic, social, cultural and commercial landscape of a city. The character of a historic building is also huge draw for large numbers of renters who value unique architectural differences, appreciate unusual floor plans and are drawn to buildings where literally every unit is different from the next. That distinction and uniqueness is appealing. It's also part of what makes renovating these buildings so challenging.

The challenges

Renovating a historic property is a balancing act that requires updates and upgrades to make the space meet modern requirements for safety, technology infrastructure and operational efficiency (not to mention upgraded with international design, engaging finishes and modern amenities)–all while preserving the architectural integrity and historic character of the building. Striking that balance isn't easy. Doing so in an efficient and cost-effective manner is even more of a challenge.

Those challenges aren't just aesthetic in nature. They include structural, architectural, logistical, environmental and mechanical/operational hurdles. Updating HVAC, plumbing, and electric, and installing a technology infrastructure can be difficult. In historic conversions, uncertainty reigns. Unwelcome surprises are common, and discovering things like substandard construction or deterioration, and hazardous substances or materials like asbestos can increase your timeline and your budget. Sometimes it's simply not possible to do what you would like to do because the structural or financial obstacles are simply too significant. Flexibility is required. Every historic building is different and has its own personality. Those differences lead to a different mix of floorplans, unit configurations, amenities and services.

The money

Qualifying for state and/or federal tax credits, is a complex and time-consuming process that requires both a substantial financial commitment and an eye for detail. Because you qualify for tax credits only after the project is completed, owners/developers need to be prepared to secure a bridge loan or other financing structure, and must be able to ensure that the construction process and finished product satisfies the agreement as stipulated in construction documents and equity structure.

Historic conversions are both more complicated and riskier. There is more risk in the development, more risk in the construction, and more risk in the financing. But those risks will be rewarded if you are able to deliver, and the good news is that the economics can end up much better than with new builds. The returns are from 50 to more than 150 basis points better yield on costs than with a ground-up development.

The risk-reward equation of adaptive reuse is not for the faint of heart–or the inexperienced. But if you do it right, the economic benefits will be there. You will ultimately have a better, more appealing community. Renters value these properties and will pay a premium to live there, and you will see higher occupancy and lower turnover.

Jonathan Holtzman is the Co-founder and Chairman of Michigan-based City Club Apartments.  City Club Apartments owns and manages more than 10,000 apartment units in 30 communities in the Midwest and has more than $500 million currently under development, construction and lease-up in Detroit, Cincinnati, Minneapolis, Louisville, Chicago and Kansas City. The views expressed here are the author's own and not that of ALM's real estate media group.