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In the world of commercial real estate, conversions have followed COVID.
The post-pandemic environment has painted a picture with a consistent presence of remote and hybrid work, causing the office market to rapidly deteriorate. For the industrial asset class, in contrast, times have been good. The industrial markets saw a spike during the global pandemic as e-commerce orders soared, and that demand has remained elevated over pre-COVID levels ever since. For Foundry Commercial, demand increase in warehouse and logistics spaces has provided an opportunity to capitalize.
Over its ten-year history, Foundry’s Development & Investments (D&I) team has sponsored 93 investment opportunities with a total investment value of $4.3 billion. Foundry is currently developing 10.2 million square feet of industrial space in 24 projects across 11 markets at a total investment value of $1.7 billion. Put all that expertise together in the space of asset conversions, and Foundry has had a clear leg-up.
Horizon Landing in Dallas
Jim Traynor, Managing Director of Development & Investments based in Foundry’s Dallas office, is the first D&I deal principal in the platform to oversee an office-to-industrial development project.
In Traynor’s home market of Dallas, Texas, Horizon Landing has been a prime example of the success found in industrial conversions. During the end of 2023, Foundry closed on the 287,000 square foot office building in Irving, Texas and has since demolished the existing structure. The team plans to build 337,000 square feet of Class-A industrial warehouses with an additional 2.4 acres of outside storage which could accommodate 70 trailer parking stalls.
Conversions of any kind obviously don’t come without hurdles.
When it comes to industrial conversions, developers can often face zoning and re-zoning issues, as well as pushback from surrounding residents. But for Horizon Landing, none of that has been a challenge.
“The reason we [Foundry’s D&I platform] liked Horizon Landing so much is because the office building was vacant, and we could go ahead and develop industrial right away,” Traynor said. “There were no zoning changes required, so we could move our industrial development forward with no approval constraints.”
Another locational advantage to Horizon Landing is that because of its proximity to DFW International Airport, there are no residential areas nearby. In a space-constrained market with little to no Class-A industrial availability that close to the airport, a brand-new logistics center just made sense.
Specifically in the Airport North submarket of Dallas, conversions are a doorway to opportunity. Since most offices in the sub-market were serving as call centers – a need that dissipated when it became clear many of those employees could work from home – the interest from office users to lease space in the area has sharply declined in the past few years.
Knowing there was demand for industrial in Airport North, we started going back through the submarket looking for office buildings that could be torn down, treated them like land sites, and viewed them as potential industrial redevelopments.
We’re basically doing the same process we would do for any industrial development on land. With this strategy, we’re now able to access a location that we couldn’t access before and deliver an in-demand product in the best part of Dallas,” said Traynor.
3800 South Congress Avenue / South Florida
In a similar transaction, Foundry’s D&I team saw an opportunity to convert a vacant medical office building owned by Baptist Health into an industrial property.
In partnership with Wheelock Street Capital, Foundry purchased the 126,000-square-foot office and warehouse building in Boynton Beach with plans to demolish the existing structure to make way for 457,000 square feet of Class-A industrial warehouses at Egret Point Logistics Center.
During a time when industrial continues to be in demand with little supply, it is exciting to partner with Wheelock Street on Egret Point Logistics Center,
said Ted Elam, Principal at Foundry Commercial. “Through this project, we are not only creating modern warehouse facilities for users, but we are also removing an older structure that has outlived its purpose, paving the way for a brighter, more efficient future.”
Located on Interstate 95 in Palm Beach County, Egret Point Logistics Center is also close to the Port of Palm Beach, Palm Beach International Airport, and Fort Lauderdale–Hollywood International Airport. The 30-acre property will eventually house two rear-load, Class-A industrial warehouses featuring 180’ truck courts, 32’ clear heights, ample car parking, and ESFR sprinkler systems. Construction on the new facilities is expected to be complete in the spring of 2025.
The Trend Continues
If COVID reminded the commercial real estate segment of anything, it’s that markets and trends can change on a dime. But as far as this trend goes, Foundry development professionals predict the office-to-industrial conversion is here to stay.
Among other conversions Foundry has already worked on, there have been landfill-to-industrial conversions as well as cemetery property-to-industrial conversions. The company is looking at opportunities that include marina-to-industrial, church-to-industrial, and flea market-to-industrial conversions, among other office-to-industrial conversions.
Properties being converted into industrial buildings are typically located in markets constrained by limited land and warehouse space. One of the primary factors driving these industrial conversions is the strategic repurposing of underperforming assets from other sectors, such as retail or office spaces. This approach not only optimizes existing real estate but also caters to the high demand for warehouse space, which many markets continue to experience. Consequently, developers and investors have increasingly opted for conversion projects, finding them a practical solution to meet the needs of the industrial sector. By transforming these properties, they can address the space shortages and capitalize on the steady demand, ensuring better utilization of assets while meeting market needs effectively.
Reflecting on the Horizon Landing project, Traynor noted, that given the mechanics of the deal and the momentum others are seeing across the country, that he wouldn’t be surprised if Foundry ended 2024 with multiple conversion projects in the pipeline.
However, he is realistic about some of the hurdles that projects of this nature will likely face. With the constraints that often come up surrounding zoning on these projects plus navigating in-place tenants and locating a property with good land value, he noted it will take time for developers to get many of these projects going at once. But no matter the speed to development, standing next to the outlook of the office market, he believes office conversions into industrial and other asset classes such as multifamily will continue on a stable trajectory.
“We’re intrigued about the prospect office-to-industrial brings. It’s an exciting opportunity to open up areas that we previously thought were full,” Traynor said. “I think this is something we will continue to see, as fast as we can find suitable properties.”
“These office-to-industrial conversions have the double benefit of eliminating what is now obsolete office space while adding much needed modern distribution space in infill locations,” added Pryse Elam, Chief Investment Officer for Foundry. “We are seeking out these opportunities in every market across the Southeast and Texas.”
