- Several hundred million square feet of U.S. office space is in need of modernizing and repositioning.
- New construction techniques minimize impact on tenants, while bringing buildings to market in half the time of new construction.
- Building operating costs can be reduced substantially with today’s curtain wall and MEP systems.
- In some areas, downzoning prohibits construction of new buildings as large as existing ones.
Tear down and rebuild or renovate and reposition? That was the question posed at a ULI Fall Meeting panel moderated by Richard T. Anderson, president of the New York Building Congress.
Tishman Construction’s Patricia Hauserman said that the U.S. has several hundred million square feet of pre-1980 office space that needs repositioning – including updating façades, upgrading infrastructure, and modernizing the lobbies, elevators, plazas, and public spaces. Even older curtain wall, she pointed out, has reached the end of its life cycle; today’s version offers greatly improved energy efficiency.
“The macro drivers for repositioning include global urban consolidation and competing new development,” she said. “In the near future, 200 urban areas in the world will control 90 percent of the world’s economy. Building owners need to attract premium tenants and stay ahead of the competition. Repositioning brings your building to market twice as fast as new construction.”
Benefits of repositioning include higher return on investment through lower operating costs, greater leasing potential and resale value, and potential tax incentives, she said. Current construction methods allow building operations to continue uninterrupted, keeping tenants happy and maximizing revenue during the conversion.
“You want a better building, but you can’t lose the tenants you have,” she said. “The technology has improved to mitigate noise and disturbance to tenants, including lightweight, low-cost building code compliant temporary weather walls. The key is to be fast and flexible.”
Robert E. Selsam of Boston Properties commented that office building modernization is an ongoing process, saying: “A structure is designed to outlive its mechanical systems.” An example is the former Citigroup building at 53rd Street and Lexington Avenue in Manhattan. Built in the 1970s, this iconic structure allowed subway passengers, pedestrians, shoppers, and office users to mingle on its “porous” ground-floor space.
“After 9/11, the world changed, and Citigroup felt that they were a target,” Selsam explained. “We went back to the original architect, KlingStubbins, for a solution. We built a new office lobby with the entrance on Lexington Avenue instead of 53rd Street, and renamed the building 601 Lexington.” The building is now 100 percent leased at very high rents, without changing its skin or innards.
Robert J. Winter, Jr. of Kinship Capital, who previously served as executive vice president of Equity Office Properties, discussed how downzoning precluded Equity from replacing an older Manhattan building with a new one of the same size. Instead, they modernized the structure at about the same cost as replacement; however, with new curtain wall, the building’s operating costs have been cut by a dollar per square foot. On 55th Street and Madison Avenue, he added, the company converted an old hotel into office space; zoning would not have permitted same-size replacement.
“Neighborhoods change over time, and you have to match supply with demand,” said Brookfield Properties Corporation’s David Cheikin. “People don’t want to work in their dad’s office building.” That was the reasoning behind Brookfield’s $250 million renovation and expansion of lower Manhattan’s landmark World Financial Center, to be renamed Brookfield Place.
“Lower Manhattan has shifted from a nine-to-five environment occupied mainly by financial services workers; we wanted to energize the first and second floors,” Cheikin went on. The massive project will transform the complex’s retail and public spaces into a world-class shopping and dining destination with a European-style marketplace, high-end fashion retailers, and waterfront dining in chef-driven restaurants.
One problem with repositioning is that it can dramatically impact property taxes, panelists pointed out. New York City eases in the new tax rates for major renovations over a period of up to ten years, said Winter, incentivizing large-scale improvements. Other jurisdictions, panelists agreed, would do well to adopt similar tax policies.