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As the lifespan of buildings decreases, developers try to adapt

In 1931, glass bottles of sparkling soda began rolling off the assembly line at the Coca-Cola bottling plant in downtown Indianapolis. The architect of the factory is unlikely to have given much thought to the possibility that changing consumption habits will make the glass bottle a relic within a few generations.

Instead of falling into obsolescence, the factory has had several lives. After the Coca Factory closed in 1971, the building was briefly used to house Indy 500 racing cars, then spent decades as a school bus garage before becoming a 139-room boutique hotel anchoring a new entertainment district last year.

A century ago, developers didn’t think much about the future, but today they don’t have the same luxury. A combination of pandemic disruption and ever-changing technologies has brought the distant hazy horizon closer.

As a result, an increasing number of projects are fighting against the clock as profitability and utility are squeezed into the ever shorter lifespan of a commercial building. Statistics illustrating the acceleration of the lifecycle of buildings are scarce, but industry experts are starting to beware.

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

“Twenty years ago, we didn’t think about it,” Prof Duarte said. There was just a hypothesis that an office building would still function a century later.

Some still are. Few developers believe the Empire State Building will go anywhere soon as it nears its centennial at the end of the decade.

A premium spot or landmark status can overcome obsolescence: areas like Midtown Manhattan or Chicago’s Magnificent Mile seem likely to remain coveted places where short shelf life would not be an issue.

“You could build a barn in Midtown Manhattan and fill it up, because it’s a prime location,” said John Gallander, an independent real estate consultant in Costa Mesa, Calif., Who has overseen the business development portfolios throughout. throughout his career.

Developers are thinking as much about the future as they are now, said Christopher R. King, president and CEO of DPC, a Denver-based commercial real estate developer. DPC has just opened a 250,000 square foot office building in Phoenix and hopes to keep it for six to ten years.

Mr King echoed the concerns of many in the industry that the pandemic had accelerated trends that could shorten the lifespan of buildings. The needs of consumers and workers are changing faster than ever before, due to technology, changing supply chains and expectations for more commodities. Such a rapid cycle is common in retail and restaurant business, but it is relatively new in commercial real estate.

This reduction in lifespan has left architects, developers and investors with a puzzle: how to build for today without becoming obsolete tomorrow?

“I think we have to think about it now,” King said, adding that his company was trying to look ahead by looking at things as diverse as parking garages, office density and technology. ventilation.

“Everyone in the industry is talking about it but going around in circles,” said Gilles Duranton, professor of real estate at the Wharton School at the University of Pennsylvania. “There are all kinds of questions, but few answers.”

The central problem is that commercial construction is an industry producing highly durable goods in a world that demands greater flexibility in the face of changing tastes and economic conditions, Professor Duranton said.

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

“Sometimes the right thing is to tear things down and rebuild from scratch,” said Professor Duranton.

The acceleration of the natural progression of office space is similar to what has been happening for decades with stadiums and shopping malls, which are coming to the end of their life much faster than in previous generations, said Gallander, the real estate consultant.

The developers, however, are at an impasse. If they stock an office building with too many specific amenities, they run the risk of the latest technology quickly becoming obsolete. (I think of offices with 80s and 90s fax machines with lots of phone hookups.) But if they don’t include enough amenities, they run the risk of potential tenants looking elsewhere.

In a way, the tenant can save the developer, Gallander said. During the Internet boom in the late 1990s, for example, developers weren’t ready to meet the growing need for connectivity. But in many cases, tenants have pushed ahead with redesigns (most leases allow for a liberal office redesign) and additional amenities to meet the challenges of an increasingly connected world. And most law firms have transformed the layout of their offices to accommodate changing technological needs. It can happen again, he said.

The shorter lifespan of buildings may force developers to get their money back faster by selling sooner than expected, Gallander said.

“You might be looking to knock on the exit door after three to five years instead of seven, 10, 15,” he said.

Raising rents is not an option, he said, as the higher cost could push tenants towards cheaper alternatives. Developers can also explore other ways to recoup their investments faster by engaging partners.

At its peak in 1950, the Coca-Cola bottling plant in Indianapolis employed 250 workers and produced two million bottles of Coke filled with fizzy per week. Today it is home to the Bottleworks Hotel, the center of a mixed-use development that opened in late 2020 in hopes of rejuvenating a neighborhood.

Site developer Hendricks Commercial Properties said the pandemic has shown the value of diversification as a bulwark against shorter lifespans of buildings. No one could have predicted that a devastating pandemic would make gathering places so unattractive, at least in the short term. But by combining offices, businesses, hotels and other uses, the risk for Hendricks is extended. The development of Bottleworks has a cinema room with eight screens, for example, but also a technological incubator.

The move towards rapid offloading of properties could pick up speed, said Gavin Thomas, the company’s vice president of development, but Hendricks is here for the long game.

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

But the specter of unforeseen change will color future plans. “Going forward, I will ask how much flexibility we have,” he said.

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