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The Value of Repositioning: A Review of Critical Trends and How to Enhance Building Performance
-- By Doug TichenorEditors' Note:¬†In late October, an engaged council of architects and designers gathered at NAREIM‚Äôs Architecture and Engineering Meeting in Chicago to consider problems and debate new ways real estate may adapt to keep up with the functional and cultural needs of human life. Doug Tichenor, a Market Analyst at Gensler, presented on how new function¬†and design¬†can add¬†value to existing core inventory.¬†
¬†***********The time for repositioning and reuse is now. The era of the single purpose office building is coming to an end and this reality is driven by a number of societal disruptions, including technological advancement, outsourcing, increased productivity, and workforce mobility. These changes have increased economic efficiency in the United States (US), each challenging the relevance of single use building. These shifts have allowed companies in today‚Äôs economy to operate more efficiently with less, forcing building owners, managers and developers to rethink the role of office hierarchy, lease depths, physical presence, and the permanence of space. In order to better position real estate assets, building representatives must make their real estate assets more agile to adjust to cost pressures. This article will explore macro trends that highlight the need and the value of repositioning, explain a process for repositioning building assets, and consider how to appropriately scale it to various levels of need.
Macro Trends Driving DemandWorkplace ‚Äì By 2020, 80% of the global population will have access to the mobile technology, directly impacting the need for real estate by companies operating in offices. Corenet Global predicts that square feet per person in the workplace will decline from approximately 180 square feet per person in 2012 by approximately 20% to 80% by 2017. In addition, while the future workplace will be denser, it will require real estate solutions that can adequately support a variety of work styles oscillating between physical collaborative work, focused ‚Äúpresent‚Äù work, and virtual work, suggesting an ascension to increased flexibility in the workplace. Workplace trends not only suggest a reduced demand for more office inventory, but the need to reshape workspaces to accommodate the needs of future work.
Image Data Source: Institute for the Future + Rockefeller Foundation 2020 Forecast: The Future of Cities, Information and InclusionEconomic ‚Äì In the past decade, current US gross domestic product (GDP) increased at a rate three times faster than the rate of office employment growth, whereas from 2005 to 2014, current GDP increased at an annualized rate of 3.3% while office employment increased by 1.3. Second, a review of Engineering News-Record (ENR) Construction Cost Index, a proxy for commercial construction costs, revealed that in the past decade, construction costs increased at an annualized rate of 3.1% compared to average office lease rates increasing at an annualized rate of 0.9%, indicating declining construction yields for office development, pointing to increased risk in the office asset class. Finally, from 2005 to 2014, new office development outpaced office absorption by an average of 20 million square feet annually in the top 142 metropolitan areas throughout the US, suggesting that the average metropolitan area added more than one million square feet of office space that was not supported by market demand in the past decade. Ultimately these are trends pointing to near-term volatility and a real estate market that may be out of balance with real estate needs.
Image Data Source: US BEA, US BLS, CoStar, ENR, Woods & PooleDemographic ‚Äì Attraction and retention of talent are among the most important issues facing companies today. The next generation of talent is widely referred to as the millennial generation (those born between 1980 and 2000). The millennial cohort is the largest, most diverse, and most educated generational cohort in the United States, representing approximately 29% of the US population. In many ways, millennials exhibit different values than the baby boomer generation. Highlighted in a an article written for the Financial Times, some experts anticipate millennials will regress to the mean of American values and effectively trade cities for suburbs in an intergenerational housing swap, millennials continue to exhibit a distinct preference for denser, mixed use communities with multiple housing typologies, a variety of transit options, and are within proximity to a variety of amenities and employment centers. These characteristics play heavily in a company‚Äôs decision on where to locate their facilities, and how to accommodate their workforce through their real estate facilities. What may be more compelling is the rise of population locating in downtown areas across the US. A 2012 US Census report indicates that city centers in some of the largest regions are becoming a places for work but also and places to live; for example, between the 2000 and 2010, metro areas with five million or more people experienced double-digit population growth rates within their city centers, more than double the rate of growth of their respective regions. This trend indicates potential demand for a variety of new urban residential building inventory.
The Process of Repositioning & Reuse¬† The time for repositioning office assets may be more relevant now than any other time in American history. Gensler Analytics has determined that throughout the US there is approximately 185 million square feet of office space that may be considered functionally obsolete and ready for ‚Äúreuse‚Äù, as well as roughly 300 million square feet of office space that may not be competitive in the market, requiring building upgrades.* In total, this equates to 485 million square feet of space that qualifies as repositionable, representing about 6% of the total office inventory that exists in the US today. Additionally, the total amount of repositionable space is 22% greater than the total amount of office space that has been absorbed in the past decade. While adding almost 550 million square feet of new office inventory in the past decade, the US office market is teetering on over-supply, rendering the lower class of space functionally obsolete, and potentially speeding up the repositioning cycle for buildings that are younger. Changing market conditions in combination with macro trends that drive demand for alternative uses creates a need for repositioning. This process is predicated on aligning market conditions with building viability, structural / mechanical integrity, and smart design. Specifically, transitioning troubled building assets into buildings that accommodate flexibility and a variety use types will ultimately enhance the durability of those building assets, and performance of the initial investment. Knowing that the time is now to think differently about building assets, building owners, managers, and developers may approach this opportunity in the following ways:
- Determine the right approach for the asset
- Implement the appropriate process for the client
- Understand how to bring value to the building
How Repositioning can Add ValueThe value of repositioning can be realized in many ways, including:
- Leveraging opportunistic costs to optimize development yields, and enhance the aggregate square foot value of the building
- Aligning phasing and parcelization of building improvements with market demand to increase agility of the building asset in volatile market conditions
- Enhancing building flexibility supporting a variety of tenants and use types, allowing buildings to respond better to market conditions and be more investable in the long-run
- Integrating sustainability to reduce long-term operating costs
- Wilson, Steven G., Plane, David A., Mackun, Paul J., Frischetti, Thomas R. (2012, September). Patterns of Metropolitan and Micropolitan Population Change: 2000 to 2010. Retrieved from https://www.census.gov/2010census/news/releases/operations/cb12-181.html
- Powell, Donald (2011, October 18). Pillars of Design. Retrieved from http://urbanland.uli.org/development-business/pillars-of-design/
- Bravi, Marina, Rossi, Marina (2013, August). Real Estate Development, Highest and Best Use and Real Options. Retrieved from http://www.fupress.net/index.php/ceset/article/view/13157
- Albert Kahn Family of Companies (2009). Facility Condition Assessment Guidelines and Field Verification. Retrieved from http://www.planningmi.org/downloads/facility_assessment_and_adaptive_reuse.pdf
- Braverman, Beth (2014, September 29). 3 Ways the Boomer Housing Crisis Benefits Millennials. Retrieved from http://www.thefiscaltimes.com/Articles/2014/09/29/3-Ways-Boomer-Housing-Crisis-Benefits-Millennials
- Institute for the Future + Rockefeller Foundation 2020 Forecast: The Future of Cities, Information and Inclusion
- Woods & Poole Economics, Inc.
- United States Bureau of Labor Statistics
- United States Bureau of Economic Analysis
- Engineering News-Record
- CoreNet Global
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