As Buildings’ Life Spans Shrink, Developers Try to Adjust

As Buildings’ Life Spans Shrink, Developers Try to Adjust

2021-02-23 14:00:08

In 1931, glass bottles of sparkling soda began to roll off the assembly line at the Coca-Cola bottling plant in downtown Indianapolis. It's unlikely that the factory's architect gave much thought to the possibility that changing consumer habits would make the glass bottle a relic within a few generations.

Rather than becoming obsolete, the factory had several lives. After the Coke factory closed in 1971, the building was briefly used to house Indy 500 race cars, then for decades as a school bus garage, before becoming a 139-room boutique hotel last year anchoring a new entertainment center.

A century ago, developers didn't think much about the future, but today they don't have the same luxury. A combination of pandemic disruptions and constantly changing technology has brought the hazy, distant horizon much closer.

As a result, a growing number of projects are racing against the clock as profitability and usability are squeezed into the ever-shorter life of a commercial building. Statistics illustrating the acceleration of building life cycles are scarce, but industry experts are starting to pay attention.

"The cycle of change is getting shorter," said Jefferson Duarte, associate professor of real estate finance at Rice University. Projects that developers could once have collected rent for half a century or more no longer allow this.

"Twenty years ago we didn't think about it," said Professor Duarte. It was simply assumed that an office building would still function a century later.

Some are still there. Few developers think the Empire State Building will go anywhere once it nears its centenary at the end of the decade.

Premium spot or landmark status can prevent obsolescence: Areas like Midtown Manhattan or Chicago & # 39; s Magnificent Mile seem likely to remain sought after places where a short shelf life wouldn't be an issue.

"You could build a barn in Midtown Manhattan and you would fill it because that's such a prime location," said John Gallander, an independent real estate consultant in Costa Mesa, California who has overseen commercial operations throughout his life development portfolios. career.

Developers think about the future as much as they think about the present, said Christopher R. King, president and chief executive of DPC, a commercial real estate developer based in Denver. DPC has just opened a 250,000-square-foot office building in Phoenix and hopes to hold that for six to ten years.

Mr. King reiterated the concerns of many in the industry that the pandemic had accelerated trends that could shorten the life of buildings. The needs of consumers and employees are changing faster than before, driven by technology, shifting supply chains and expectations of better facilities. Such fast cycles are common in the retail and hospitality industry, but it is relatively new to commercial real estate.

This shorter shelf life has puzzled architects, developers and investors: how do you build for today without becoming obsolete tomorrow?

"I think we are forced to think about it now," said Mr. King, adding that his company is trying to look into the future by looking at things as diverse as parking garages, office density and ventilation technology.

"Everyone in the industry is talking about it, but circling it a little bit," said Gilles Duranton, a professor of real estate at the Wharton School at the University of Pennsylvania. "There are all kinds of questions, but few answers."

The core problem is that commercial construction is an industry that produces highly durable goods in a world that demands greater flexibility with changing tastes and economic conditions, Professor Duranton said.

He added that the industry should address the shorter lifespan through a mix of approaches, including modular elements and construction methods that allow buildings to be easily dismantled or demolished.

"Sometimes the right thing is to tear things down and build from scratch," said Professor Duranton.

The acceleration of natural progress in office space is similar to what has been happening for decades with sports stadiums and shopping centers, which are reaching the end of their lives much faster than in previous generations, said Mr. Gallander, the real estate advisor.

However, developers have a bond. If they have an office building with too many specific facilities in stock, they run the risk that the latest technologies will quickly become obsolete. (Fax-friendly offices from the 1980s and 1990s with myriad telephone lines come to mind.) But if they don't have enough amenities, they take the opportunity that potential tenants look elsewhere.

In some ways, the tenant can save the developer, said Mr. Gallander. For example, during the rise of the Internet in the late 1990s, developers were not ready to meet the growing need for connectivity. But in many cases, tenants continued to redesign (most leases allow for liberal office redecoration) and additional amenities to face the challenges of an increasingly wired world. And most law firms have changed the layout of their offices to adapt to changing technology needs. That could happen again, he said.

The shorter lifespans of buildings may force developers to recoup their money faster by selling ahead of schedule, said Mr. Gallander.

"You may want to reach the exit gate after three to five years instead of seven, 10, 15 years," he said.

Raising rent is not an option, he said, because the higher costs could push tenants towards cheaper alternatives. Developers can also explore other ways to recoup their investments faster by hiring partners.

At its peak in 1950, the Coca-Cola bottling plant in Indianapolis employed 250 employees and produced two million bottles of sparkling water cola per week. Now it is home to the Bottleworks Hotel, the center of a mixed-use development that opened in late 2020 with the hope of rejuvenating a neighborhood.

The site's developer, Hendricks Commercial Properties, said the pandemic had demonstrated the value of diversification as a bulwark against a shorter building life. No one could have predicted that a devastating pandemic would make meeting places so unattractive, at least in the short term. But having a mix of offices, shops, hotels, and other uses spreads the risk for Hendricks. The Bottleworks development, for example, has a cinema with eight screens, but also a technical incubator.

The move towards quick property unloading may accelerate, said Gavin Thomas, vice president of development at the company, but Hendricks is in it for the long haul.

“Hendricks' timeline is not a three or ten year horizon,” he said. "It's much longer than that, and that changes the dynamics and criteria for return."

But the ghost of unexpected change will color future projects. “In the future, I will ask how much flexibility we have,” he said.


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