As a long time practitioner of remodeling over building new I am glad to see a focus on retrofitting commercial builds. As I learned when I attended a GreenBuild NYC lecture in October there is a great need as well as interest in retaining buildings but renovating them to be energy efficient, aesthetically interesting, enhanced capacity and green features.
Today's article in the New York Times discusses such projects at length as they relate to New York. But I am aware that Pittsburgh and Philadelphia are also two highly focused cities keen on restoring buildings with a green appeal.
There is inherent value of seeing the green in these projects. From costs savings to overall materials use and reuse along with time, this is one way to see the value in going green - certified or not.
As I look forward to seeing more interesting projects on the horizon I see it also as a way of further restoring the industry as well.
Developers See Possibility (and Value) in Old Steel
By ALISON GREGOR
Published: April 6, 2010
As commercial real estate development nearly comes to a halt in the economic downturn, some well-capitalized investors are focusing instead on sprucing up existing properties. The process has various names: retrofitting, renovating, repurposing, even repositioning. But the underlying idea is to wring out more value at a time when rents will not support new construction.
In New York, prominent buildings like the Empire State Building and 500 Fifth Avenue are being rehabilitated, while 475 Park Avenue South will get a $25 million renovation and face-lift led by the architect César Pelli. Refurbishments have just been completed at 200 Fifth Avenue, the former International Toy Center, and 545 Madison Avenue.
While not all of these projects have a direct tie to the recession, many do, including one started by the Hampshire Real Estate Companies, a real estate firm in Morristown, N.J. The company plans to spend roughly $16 million upgrading a rather ordinary four-story suburban office building called Centra, at 186 Wood Avenue South in Iselin, N.J., near the Metropark train station.
The architect for the project, Kohn Pedersen Fox Associates, which typically takes on projects like the 101-story Shanghai World Financial Center, envisions taking the building down to the steel and expanding the fourth floor to create an overhang supported by a treelike column. A causeway entrance will span a sunken garden that will open up the basement for office use.
“Here’s a small building that’s going from about 75,000 square feet to 110,000 square feet, but with the redesign, it will have the presence of an iconic building that tenants can rent for a reasonable price in New Jersey,” said A. Eugene Kohn, chairman of Kohn Pedersen Fox. “This is a really good example of repositioning a building.”
Mr. Kohn said his architecture firm had completed designs for dozens of rehabilitation, renovation and expansion projects over the last three decades. The projects may range from simply redesigning the lobby and upgrading elevators to stripping a building down to the frame and replacing almost everything but the foundation.
“All these projects are taking existing structures and enhancing them, allowing the owners to get much greater return on them,” he said.
While building owners may begin such projects any time it makes financial sense, they tend to predominate during recessions, Mr. Kohn said.
“One of the first problems that developers face in a recession is the office rents you can get do not equal what it would cost to buy a site and build new,” he said. “In bad times, dealing with existing stock and upgrading it seems to make more sense.”
Also, in recessions, tenancy in general is shrinking, leaving some buildings half-empty, especially older ones that may have lost tenants who took advantage of falling rents to trade up. Office buildings that are empty or half-empty can be good candidates for repositioning.
“A lot of these buildings may be close to half their recent value, compared to where they were before the crash,” Mr. Kohn said. “If you can now buy an existing building for a great price, you can afford to upgrade it and get great rents, and you spend less than building new.”
Hampshire, which manages investment funds and is fully capitalized, is looking for such opportunities for its investors, said Todd M. Anderson, a principal with Hampshire. Its 19-acre site in Iselin, formerly owned by the Siemens Corporation, was the perfect investment candidate as it had unused development rights, he said.
In addition to the retrofitting of Centra, which will open by the end of this year, Hampshire is also preparing to build three more office buildings — which will total 535,000 square feet — and two large parking garages at the site.
Mr. Anderson said that some developers might have decided to demolish the rather mundane office building and replace it, but that retrofitting made sense for several reasons. First, even taking it down to the steel was cheaper than tearing down and building anew.
“A lot of people would say there’s nothing you can do with it; it’s a small building that’s badly sited,” Mr. Anderson said. “But there is inherent value in the bricks and mortar. Estimates were potentially up to $5 million in savings on a construction basis utilizing the existing structure.”
Even if the construction savings had been minimal, there were other reasons to save the building, Mr. Anderson said. If developers rebuilt, they would lose grandfathered zoning entitlements that were attached to the structure, he said.
Also, repurposing has received a push from the “green” building sector, where renovation is obviously looked upon more favorably than building new.
“The focus on sustainability in this business has become huge,” Mr. Anderson said. “So anything you can do to foster that effort is worthwhile and hopefully makes economic sense as well.”
The new Centra will be certified as either silver or gold by the United States Green Building Council, Mr. Kohn said.
At 545 Madison Avenue, near 55th Street, the owners invested $90 million in a gut rehabilitation and redesign led by the architecture firm Moed de Armas & Shannon to transform a faded Class C building built in the mid-1950s into a Class A office tower attractive to tenants like hedge funds.
It was the first time that LCOR, a real estate investment and development company, had done such an extensive rehabilitation project. When the company signed a 75-year ground lease at 545 Madison in 2006, the building’s office rents averaged less than $30 a square foot; after the work, asking rents are $75 a square foot, said David A. Sigman, a senior vice president. LCOR has recently leased to five companies, including CS Tang, a hedge fund.
“No question about it, it’s a more valuable property than it was the day we took it over,” he said.
LCOR saved the cost of building a new structure, which could have been $50 to $100 a square foot, and also avoided the delay of a demolition, which would have added a year to 18 months to the project. Though he described the project as a success, Mr. Sigman said he did not know if LCOR would repurpose more office buildings in the future. One reason 545 Madison Avenue was a good candidate was that all its office leases, which were timed to a ground lease, expired once LCOR leased the site in 2006, so the building was empty.
While buildings can be repurposed with existing tenants, those projects are typically much more expensive and risky, Mr. Kohn said. Tenants in the building must be shifted around to accommodate construction, which can only be done piecemeal and may create hazards.
“Still, as long as the bones of the existing building are good, and if the basic structure is in reasonable shape, and the floor sizes are O.K., any building can be a candidate for repurposing,” he said.