Revitalising real estate: breathing new life into old buildings

Poland boasts a significant potential for the adaptation and modernisation of older commercial buildings. Despite many of these structures being over a decade old, only a fraction has been renovated. Investors face a tough decision: renovation or rebuilding from scratch? This article explores the latest trends, economic benefits, and spectacular projects that are transforming the face of Polish cities.

In Poland, we have about 23 million m² of commercial space considered modern, but older than 10 years. Of this stock, only about 4 million m² has been recently modernised. The figure for office buildings is about 6 million m², of which only 1 million m². has been altered. Of the 9 million m² of older shopping centres, only 3 million m² has undergone a facelift. Warehouses rarely undergo upgrades, even when they are older. Often it’s more profitable to demolish and build new.

In real estate, there is a risk of a so-called ‘doom loop’ – a situation in which a lack of investment leads to a decline in the popularity of the facility and a deterioration in financial performance. A ‘boom loop’, on the other hand, is a building’s self-perpetuating appeal, generating ever-increasing revenues. The art of investment management is to stay in the former loop and not fall into the latter. There are many examples in Poland of properties that have been neglected and fallen into disrepair. Investors often face a choice between renovation and change of function or demolition and building from scratch. Sometimes the cost of construction is lower than renovation, and the building is so inefficient that reconstruction will not improve its situation. In such cases, the economic calculus and the long-term impact of the building on the neighbourhood, the city and the users should be decisive. However, is this always the case?

In recent years, the most spectacular investments have been adaptations. Conservation protection has forced investors to leave the old fabric and design it anew. This has resulted in a number of attractive investments that have revitalised previously unknown parts of the city. Examples of such projects include Norblin Factory, Warsaw Breweries, Elektorownia Powiśle, Koneser Praga Center and Hala Koszyki.

Research on the benefits of building adaptation has yielded the following results in a pan-European study: rent increases in certified buildings over non-certified ones range from 6% to 8%, property value increases after building ‘placemaking’ range from 8% to 15%, and capital value increases in sustainable properties range from 14% to 16%. Other benefits include the achievement of ESG goals, a decrease in vacancies and a reduction in operating costs.

The most important aspect of upgrading is the potential of a given investment opportunity, which can translate into an increase in value. Especially in a purchase or sale transaction, it is worth analysing the actual potential of a property to know its value.

When analysing the potential of a property, five areas should be examined: the market and competition, the technical condition of the building and ESG solutions (e.g. energy efficiency, climate risks and the possibility of improving the level of certification), the users and their preferences, the management and use of the building (e.g. PropTech solutions), and most important – the financial flow (costs and revenues).

The Highest and Best Use (HBU) reports, which are a scan of these five areas and show the most beneficial solutions, are great for this type of analysis. Giving up on HBU can be a mistake. What sometimes seems obvious at first glance (“let’s make apartments here!”) doesn’t have to be so at all. The next step analyses the feasibility of a specific investment (feasibility study).

From the investor’s point of view, all risks are significant and should be taken into account in the valuation. Adapting a building involves taking it out of current use and revenue generation. High and changing construction costs must be taken into account. Planning and permit restrictions are also important, which can thwart original plans. Occasionally, a site may not be able to increase its rentable area or parking requirements have changed.

From a financing perspective, a building with an upgrade or redevelopment plan is analysed in terms of cash flow generation and project valuation, which determine the value of the financing commitment. In cases where a bank is already financing an adaptive reuse or retrofit, regulators require more diligence and more stringent project controls, and may require active project management. So it is worthwhile to have a good strategy derived from deep analysis.

There are many strategies for property adaptation on the market. The most reasonable and obvious one is always to maintain the original function and improve the performance of the building. Sometimes these are merely marketing treatments, such as repositioning and renaming. Often, however, a major change is required, including improving energy consumption, filling the first floor with services and retail, or placemaking. Diversifying functions, that is, adding retail, service and entertainment sections, is often a good strategy for office buildings. Likewise for older shopping centres – converting a hypermarket with a mall to a retail park format is a favourable solution. Many office properties can also be used for office-like functions, such as education, conference centres, training centres, private schools, film studios or entertainment. In this case, there is no need to significantly interfere with the structure of the building. An example – office buildings in Mokotów, where spaces are leased by international elementary and high schools.

The most difficult seems to be the replacement of office functions with residential (hotel, residential, dormitory, etc.). In this case, the key issues are the structure of the building, the cost of conversion, and planning, which limits many such changes and excludes, for example, residential functions in areas designated for services or industry. The market, however, has its own rules and finds solutions to many challenges, as shown by the rapid growth of PRS in recent years.

Observing the speed of aging of buildings and the need for change, it seems reasonable to build and design facilities in such a way that they can easily change their functions and be flexible in response to market demand. A similar approach could be applied to urban planning.