Activating Historic Buildings
Downtown is a destination for culture and entertainment. In a recent poll, 70% of Guilford County residents agreed that “Downtown Greensboro is a vibrant place that is steadily improving.” Almost three quarters of respondents visit downtown at least once per year, and half of these go downtown more than twice a month. Young professionals and upper middle class households go downtown the most. This is reflected in downtown’s retail and dining sales of $120M in 2009.
Downtown’s unique building stock is at the core of its retail culture. Downtown’s mid-rise historic buildings are among its greatest assets. The buildings’ architectural features, small floor-plates, and proximity to cultural and employment anchors provide the physical and economic for a dense, mixed-use district with an authentic identity. Unlike regional shopping centers that offer comparison goods such as clothing, downtown is a destination for leisurely shopping for specialty goods, such as art, antiques, jewelry, furniture and home decor. Downtown is home to more than 160 retail and restaurant businesses, more than 90% of which employ less than 15 people.
Despite demand, retail growth has been slow. Despite the fact that downtown is attracting significant from visitors and a growing residential base, businesses have trouble staying open. Assuming an industry standard of 10% rent-to-sales ratio for successful retail, a business would need to generate $420,000 in annual sales in a typical downtown space of 3,000 SF with $14/SF rent. Local market data suggests that retailers in downtown Greensboro are achieving a lower sales volume, and spending closer to 25% of sales on rent. High start-up costs compound already tight operating margins and impede the success of many storefront retail businesses. Downtown’s retail is currently approximately 15% vacant along Elm St, and anecdotal evidence suggests that many businesses do not survive the first year of operation.
Poor building conditions are the greatest economic barrier to the success of new retail. Many buildings in Greensboro were constructed in the early/mid-1900s and are in need of major renovations. The cost of rehabilitating ground floor spaces and creating a “vanilla box” for retail use will range from $40-$80 per square foot depending on the building’s condition and original design. This either drives rents higher or creates an extra upfront burden for the tenant. Many buildings have likely remained vacant because owners are unwilling to undertake the upgrade cost on a speculative basis.
Downtown also has a nascent residential constituency. As in other cities around the country, increased activity in downtown is driving an increase in downtown residents. Almost 600 new multifamily residential units have been constructed downtown over the past 5 years. This activity represents a 50% increase in downtown residents, bringing the total to approximately 1,500. Residents are an essential component in ensuring an active, safe downtown. Like retailers, residents are committed stakeholders who help ensure a safe and well-maintained downtown through their advocacy, participation, and physical presence.
Upper floor residential uses face economic challenges similar to those of lower floor retail. The upper floors of mid-rise historic buildings are opportunities for residential rental and ownership. Demand from young professionals can more than support rental uses within buildings after renovation costs are paid off. However, converting a building to residential uses entails changing its permitted use and therefore complying with a new set of codes, which include requirements for additional plumbing and the like. Renovation costs as high as $80-100/SF cannot be justified by current market rents of $1,200 for a two-bedroom unit.
Market forces preclude investments in building rehabilitation. In recent years, many owners of vacant buildings have considered either investing in their buildings or selling them, but have ultimately decided to do neither. Rehabilitation projects achieve acceptable returns on investment in 10-15 year timeframes. However, lenders typically require a 20% down payment and almost all revenue in the early years must be dedicated to debt service. The resulting cash flow is therefore so small that it cannot justify the upfront capital investment or risk of undertaking a project in a building with unknown capital needs. This is particularly true for owners who are not in the real estate business and therefore may not have the required expertise or access to low-cost capital that developers do. Potential purchasers will be willing to pay very little for properties as acquisition costs make profits margins even thinner. An outside catalyst is therefore needed to help realize the buildings’ full potential.
