No lots? No problem: Developers turn retail into rentals

With open land scarce, multifamily builders are pursuing adaptive reuse

By: Suzannah Cavanaugh

CP Capital co-head Paul Doocy and managing director of CBRE Land Services Group Steve Lehr (LinkedIn, CBRE)

Experts agree: the multifamily market is on fire.

Rents have exploded nationally as demand for apartment-living soars. And no region has seen greater growth than the Sun Belt, where rents have jumped 22 percent in a year, versus 17 percent nationwide, according to Realtor.com.

But developers looking to cash in on that demand face a scarcity of buildable land.

Not to be deterred, crafty firms are turning real estate’s lemons — retail stores and movie theaters that shuttered during Covid — into multifamily lemonade. A growing crop of adaptive reuse projects aim to replace defunct malls and department stores with residential construction.

Paul Doocy, co-head of financial consultancy CP Capital, is one of the advisers elbow-deep in those growth-market projects. While his firm’s scope is national, Doocy said his work lately has been concentrated in Southern suburbs where demand is highest and land is hard to come by.

“The infill suburban lots, the ones that are zoned and ready to go, are just gone,” said Doocy.

Cities are no stranger to this problem. The prioritization of office buildings over apartments and NIMBYism have stymied multifamily rezoning for decades, said Steve Lehr, managing director of the CBRE Land Service.

But when the pandemic hit and renters converged on suburban space across the South and West, demand for rentals overwhelmed existing pipelines.

Last year, multifamily construction starts nationwide hit a high last seen in the mid-1980s.

Nearly 17 percent more apartments came online last year than in 2019, according to Statista. And nearly one-third of those units are concentrated across the Sun Belt.

A Yardi Matrix ranking of the 10 cities with the most multifamily units underway included

Dallas-Ft. Worth, Phoenix, Los Angeles and Miami.

At the same time, Lehr said city agencies tasked with approving rezonings were crippled by the pandemic, delaying the approval of available sites. He said agencies will be hard-pressed to catch up with the demand.