Beyond The Bones: Future-Proofing And Creating Value In Repositionings
A building needs to have good bones. That is the first thing commercial real estate professionals who specialize in adaptive reuse and repositioning will tell you. If the shell is in great condition, a developer has the foundation for a great redevelopment.
But there is more than that. The conversations at Bisnow's Chicago Repositioning and Adaptive Reuse event, in front of over 200 people at 1006 South Michigan Wednesday, took interesting detours into how to engineer value during the planning process and how to future-proof yesterday's buildings for tomorrow's end users.
Does It Pass The Napkin Test?
UrbanStreet Group co-founder Robert Burk said major redevelopment projects like Viridian, his firm’s redevelopment of Schaumburg’s Motorola Solutions campus, are not simple real estate repositionings. Before moving forward with a redevelopment, Burk said it must pass the "napkin test:" Do the numbers work? A repurposing strategy can drastically alter everything from floor plates to stairwell size, and that can impact underwriting.
“Buying a building or an adaptive reuse project takes on a whole series of challenges. Your analysis needs to be greater,” Burk said.
Franklin Partners partner Raymond Warner said basis is paramount. Once that has been determined, a developer needs to look at the efficiencies of a building and focus on how the end user will interact with it. That entails putting a strategy together and reviewing the underwriting in place before placing an offer.
Warner said the numbers worked for Franklin Partners' repurposing of Office Max’s former Naperville headquarters at 263 Shuman Blvd., which begins construction next week. Warner said the project will have a first-of-its-kind amenity package for East-West Corridor office space. The building has 45K SF of below-grade space. Roughly 25K SF of that is being converted into common space for tenants like conference rooms and coworking space. Franklin Partners retained Compass to run a market-style deli on-site, and a planned fitness center will be professionally operated.
“We’re energizing a closed-off building,” Warner said.
He said the most demand is coming from corporate tenants looking for office consolidations along with upgrades in quality.
Cost of Occupancy Matters
Avison Young principal Randy Waites said the value property managers like him contribute during the repositioning process is in determining budget efficiencies for when the building comes online. A developer can find a building, plan a concept that makes financial sense and identify a young tenancy that wants to be there, but it still comes down to economics.
“How can we service those tenants? How can we run the buildings? What are the specifications for simpler things like janitorial, and how do we design that around these types of buildings while they’re going through the redevelopment process? At the end of the day, cost of occupancy matters,” Waites said.
Waites said Avison Young takes a holistic approach to create the right occupancy cost structure so developers can achieve the leasing velocity they seek and satisfy the tenant base. Waites said Avison Young is working with Condor Partners on its Pilsen Mural project, which landed 5 Rabbit Cerveceria as a tenant last month.
Future-Proofing Can Control Costs
Wright Heerema Architects principal Roger Heerema said in the past, adding amenities was a piecemeal process with different amenities added over time — a process that created limitations in future leasing around spaces. Owners are now looking at amenities as a singular, cohesive element that makes a building more attractive to brokers and prospective tenants on tours.
"In creating flexibility, it does future-proof a building, to some extent," Heerema said.
It also frees up space. ESD Senior Vice President Andrew Lehrer said the biggest challenge to future-proofing infrastructure in older buildings is cost. ESD works with its clients to leverage as much of a building's existing infrastructure as possible, centralizing spaces to create an open, cohesive experience with multiple uses. This allows a developer to capture added value and limit the amount of new infrastructure to add.
With Willis Tower's renovations, ESD designed the building's roof amenities space so it could leverage the existing mechanical systems and maximize how the rooftop's footprint is programmed to create value.
Shapack Partners Director Paige Hennessy said while the bones of a building are important, a developer should also be looking to adapt a project to the neighborhood to create places people want to be. In Chicago, that means having public space on the ground floor. What makes Soho House Chicago different from Soho House's other locations is that the ground-floor programming is available to anybody walking in from the street.
This was a hard sell for Soho House CEO and founder Nick Jones. Soho House's other locations are usually closed off to the public, with the doorman situated outside, the first impression of Soho House's exclusive allure. Hennessy said that would not fly in Chicago, where the lobbies of office buildings and hotels are often activated for public use.
"Being Chicagoans, they're going to say 'F you,'" Hennessy said.