Are historic buildings the cure for what's ailing retail?

In Chicago, RH’s flagship location is a lot more than a furniture showroom. The upscale retailer (formerly known as Restoration Hardware) transformed the Three Arts Club, a landmark 1915 building that had been vacant for years, into an immersive luxury retail experience akin to exploring a gallery of modern design, paired with wine bar, restaurant and rooftop terrace.

In Philadelphia, a historic naval yard now hosts the global headquarters of Urban Outfitters. Retaining the site’s original character wherever possible, the fashion retailer reflected its brand in the design by marrying edgy modern elements with gritty industrial heritage.

These high-profile examples illustrate a strategic shift among retailers who, faced with growing disruption from e-commerce and pandemic fallout, are turning to historic properties to compete for clientele.  While redeveloping historic properties can be challenging, broader benefits can make adaptive reuse an attractive option for developers, investors, and/or occupiers to differentiate their brands, demonstrate ESG priorities, and leverage unique financing opportunities.

Attracting Today’s Consumers

Online megastores dominate the retail market based on selection and pricing. Traditional retailers must compete on alternative measures. When consumers opt for brick-and-mortar shopping, they are often seeking an experience: vibrant, sociable settings; dining and entertainment options; or unique offerings from small or local businesses. Historic properties, with their distinctive architecture and inimitable character, offer inherent differentiators to satisfy experience-hungry customers.

Shoppers prefer retail and hospitality experiences in proximity to non-retail, mixed-use amenities, such as co-working franchises, apartment living, civic amenities, and leisure facilities—many of the components naturally provided by downtown shopping districts. New retail developments are often patterned after “Main Streets,” with courtyards and fountains, and rhythmic façades that mimic smaller individual buildings.  Metro urban growth across the United States means that developers and investors have the opportunity to tap underutilized historic downtown real estate to create these desirable districts, essentially by reusing the main streets that many cities and towns already have. Historic non-retail warehouses and industrial facilities convert very well into retail and mixed-use commercial, due to their inherently flexible open plan spaces and gritty aesthetic. Conversely, abandoned retail department stores in downtown locations can be ideal for reuse as offices, galleries, loft apartments and more, with large storefront windows and open interiors.

The ESG Advantage

The reuse of historic properties to create sustainable retail spaces may appeal to environmentally- and socially- conscious investors and consumers while strengthening brand identity and loyalty.

Reuse is a tenet of environmental stewardship. Demolishing and rebuilding consumes far more raw materials and energy, and is more costly, than rehabilitating and reusing an existing building. Beyond initial development, retail interiors and storefronts must undergo more frequent renovations than most other building types to remain competitive. These frequent renovations create unnecessary waste. Reusing existing historic elements (or using salvaged materials) and integrating them with modern retail design on a less frequent cycle is more sustainable, saves money long term, creates unique spaces, and is more historically sensitive.

Reuse of historic buildings can have significant social impact, too, especially as part of revitalization efforts.  It can provide a catalyst for economic recovery in areas impacted by recession. Sensitive rehabilitation of interiors and storefronts can increase business and provide evidence of a successful district revitalization. Keeping buildings occupied and in use also protects them from deterioration.

Historic commercial properties are also excellent incubators for “entrepreneurial ecosystems.”  They provide variety, including small and diverse spaces with a range of rents including affordable. They also provide critical transition spaces for small businesses growing from pop-ups and market stalls to bricks-and-mortar retail establishments.

Finally, regeneration of the historic built environment supports community, tapping into cultural identity and preserving local heritage and the community’s sense of place.

Financial Incentives and Tax Credits

Designated historic properties are eligible for Federal and State Historic Tax Credits, a unique benefit only available to historic buildings that are either individually listed or in a historic district. These tax credits combined can provide up to 45% towards the cost of qualifying rehabilitation works. In a construction market where supply chain issues and labor constraints have driven prices sky-high, this is a significant benefit. If a historic property is not designated on the National Register of Historic Places, it is often worth seeking designation to create eligibility for such tax credits. A historic preservation consultant can evaluate and submit the property or district to be accepted onto on the National Register, then guide the developer through the Historic Tax Credit process.

Historic Tax Credits can also be bundled with other financial incentives such as New Market Tax Credits, Opportunity Zones, Tax Increment Financing, Enterprise Zones, local grants and façade improvement schemes, and other programs.

Overcoming Challenges

As investors seek to place capital in a highly competitive real estate market, developers and investors can tap into enormous value from underutilized or obsolete building stock. A recent Deloitte study found 50% of respondents acquiring property solely for repurposing, but 60% said they were held back by economic, legal, and physical constraints. A consultant with expertise in adaptive reuse—and particularly with historic properties—can help overcome these constraints and unlock the growth potential of historic assets.

A successful, sustainable, historic reuse project requires a professional assessment of energy usage, carbon footprint and emissions, embodied energy, and financial paybacks, along with an assessment of historic significance to sustain and enhance the qualities of the architecture. A qualified engineering consultant should assess the property to determine what is required for the building to be viable, feasible and fit-for its proposed use, with special consideration for historic building concerns such as condition, structural integrity, and reuse of MEP systems. The wildcard in historic adaptive reuse projects is the uncertainty around costs and processes, much of which can be reduced through enhanced due diligence and engaging a consultant who understands the many facets involved, including historic repair techniques, costs, permitting and tax credits.

In a highly competitive, complex, and dynamically shifting retail market, small gains matter, and the conditions created by the Covid-19 pandemic have provided a catalyst for transformation. Rehabilitation of historic properties has significant untapped value, provides a tangible differentiator, and – with proper risk mitigation – can be a profitable venture that benefits the project owner, retail tenants, consumers, and their communities.