CREJ - Office Properties Quarterly - September 2017
Metro Denver should copyright the term “crane watch.” After all, the city and its suburbs are still knee-deep in the big money office building boom. Indeed, there is over 10 million square feet of office building construction underway or planned for this year alone, which would likely be a record breaker in most other markets. Here, not so much. In fact, the period during which most office buildings were delivered across the metro area’s submarkets was 1980 to 1985, a mark that industry experts admit will be difficult to eclipse. Most of those buildings are still around, still functioning and still quite vital to the area’s overall office market health. But how can those aging properties compete with the sparkling new, state-of-the art product coming out of the ground? “In many cases, they won’t be able to compete,” said Darrin Revious, broker with Denver’s NAI Shames Makovsky. “HVAC and other systems improvements, aesthetic changes and common area amenities can approach what a new building can offer, but new buildings already have all those things and more. Of course, tenants have to pay premium rents for new product, and many won’t or can’t do that.” Clearly, landlords of the aging inventory have their work cut out for them. And the competition for tenants is just as fierce among other owners of the same building types. In Denver’s central business district alone, owners of most of the 1980s era skyscrapers have ponied up a combined $82 million for capital improvement projects as of April, according to research compiled by Denver’s JLL office. That’s an average project cost of $4.6 million. Again, an astounding number, but clearly indicative of the requirement for those buildings to stay relevant in this vigorous market. “Landlords have to look at the return on cost,” said Linda Kaboth, vice president at Englewood’s Rise Commercial Property Services. Kaboth notes that one of four factors must drive the justification for significant improvements to an aging building. “It should be able to increase rental rates, increase occupancy, lower operating expenses or demand a higher sale price of the asset,” she said, and adds that combinations of those factors are always in play. “New, more efficient lighting might decrease operating costs and improve the building’s aesthetics, for example, but the scope and type of renovations to the ’80s product requires much more thoughtful analysis than just improving a lobby,” she said. That said, lobbies that do bring some of the “wow” factor and offer a range of multipurpose areas can be the cornerstone of an aging building’s public area resurgence, if space will allow and if embedded amenities match or exceed those of other properties with similar rental rates. Those amenities can include fitness areas, locker rooms, bike storage, cafés, Wi-Fi everywhere, or some kind of outdoor space for both work and leisure activities. In reality, those features, or at least a majority of them, serve only as a baseline from which most landlords must build just to stay in the conversation. For those properties, it’s a perpetual game of catch-up that never quite seems to end. Even when those owners do dedicate significant funds to wide-ranging improvements, unforeseen challenges can and frequently do complicate retrofit projects. Building code issues continually bedevil owners and property managers, the compliance of which is nonnegotiable. The new energy codes, for example, require Denver building owners to scrap existing fluorescent lights and replace them with more efficient LED lamps and fixtures. This is but a single component of the 2017 International Energy Conservation Code, which mandates an upgrade to more sustainable lighting and controls. Improvements like this are never cheap and can put a significant dent in discretionary budgets, which might have otherwise been allocated for public area design and furniture, for example. Again, new building owners don’t have to contend with any compliance surprises. Every code requirement is already accounted for and every building amenity has already been designed, approved and constructed with state-of-the-art methods and materials. The good news for those 1980s era building owners is that occupancy still boils down to what tenants want, and tenants still want value. Of course, it is the millennials who drive the market and ultimately define what value is. “Those employees dictate not only tenant design, but building retrofits as well,” Revious said. “Tenant spaces are going to continue to evolve, and owners of older product are responding by bringing the sizzle, the cool. That’s the necessity of the market.” In fact, push back on the open-plan office is fueling some of that sizzle. C-suite players have been increasingly vocal about the disruptive nature of the open office, but many employees who once may have lauded the wide-open egalitarian work style now are starving for privacy wherever they can find it. In a piece about office design strategies published last month in Fast Company’s Co. Design digital magazine, one quoted architect put it this way: “When [I] asked where a young client goes for privacy, the response was ‘Starbucks,’ which is not unique.” The “not unique” part of that statement is what speaks volumes. Companies that are slow to address these pervasive facility issues are paying a price in lost employee productivity and morale. On the other hand, 1980s building landlords and their savvy property managers are profiting from these tenant-based design deficiencies by upgrading and repurposing building common areas. Both open and enclosed private breakout spaces in or near lobbies, for example, can offer building tenants a privacy amenity that may have been lacking or absent in their own offices. Even fussy millennials may opt out of Starbucks if given the option to stay in their own office building and complete the tasks that they previously may have deemed impossible. Of course, no two buildings are alike, and property managers must sell the individual benefits of those renovations aggressively and consistently. And intangibles do matter. “It’s not always about the numbers,” Kaboth maintains of the metro area’s aging office inventory. “You can take these ’80s buildings and create a similar environment to new product with the right renovations at the right time. The bones are there. And every building has its own personality.”