A magnitudinous confluence of the corporate return-to-work push, supply chain issues that appear to be worsening, rising interest rates and the realization that office space needs to be recently built or updated to be competitive is fueling a historic surge in renovations.
In recent months, for the first time ever, architectural firms are making more income from renovation work than new construction, said American Institute of Architects Chief Economist Kermit Baker, who expects the run on retrofitting to be more than a late pandemic blip.
It is being driven in part by an “onslaught” of building renovations happening right now, according to CBRE Global Head of Occupier Thought Leadership Julie Whelan. Landlords, in a moment of record-high vacancy and looking to differentiate their properties for future tenants, are spending vast sums on major upgrades.
Courtesy of Sage Realty
A rendering of the future lobby at 767 Third Avenue in New York City, part of Sage Realty’s $53M upgrade.
Sage Realty, which just announced a $53M upgrade of 767 Third Avenue, its Class-A office tower near Grand Central Terminal in Manhattan, went for a “wholesale demo,” said CEO Jonathan Iger, including a new lobby space and a reworked amenities program for tenants, including a library, terrace garden, cafés and communal spaces. It is a push to attract boutique companies and create optimal amenities for tenants at a competitive moment for New York office space.
“The mindset right now is that you have to be reinvesting in your property,” he said. “It’s about how you define quality.”
Architecture firms are drowning in work, Baker said. The industry started recovering from the pandemic downturn in February 2021, and billings exploded again this past March, when clarity around the rise in interest rates led many to rush to finalize plans and designs to start locking down financing.
Brookfield and WatermanClark plan to put $100M into the renovation of the midcentury Lever House in Manhattan. Chicago’s legendary Merchandise Mart is getting a $40M facelift, and Boston’s One Post Office Square is finishing up a $300M upgrade. From Atlanta to Houston, there is a push to make changes and embrace new technology, especially for older buildings fearing obsolescence.
“They’re so busy they’re having trouble finding staff, and there are project backlogs,” Baker said. “The pipeline for new architects isn’t as quick and easy to expand as other professions.”
Data from occupancy sensors and space analytics, as well as suggestions from consultants, are informing these workplace alterations. Density, which focuses on installing sensors to measure and analyze office activity, has seen a large increase in accounts over the last year and a half, due primarily to companies seeking to understand the impacts of newly redesigned offices on workplace performance, said Nellie Hayat, the company’s workplace innovation lead.
“Most of our clients who adopted the wait-and-see strategy in 2020 have now decided to move forward with plans to redesign their offices to accommodate a hybrid workforce,” Hayat said.
Baker doesn’t have any recent data on how much of the recent boom in work is due to office and commercial renovations. The last time AIA took such a survey of architecture firms in early 2021, the big push for work was from sectors seeing a Covid-19 boom, such as manufacturing/warehouse, multifamily residential and K-12 education. AIA hasn’t taken a similar survey in recent months as the return-to-office push has been a larger focus, and as Baker points out, not all of these kinds of upgrades and renovations require an architect.
Landlords and especially tenants can be risk-averse to making big changes, so those staying in place with long-term occupants or tenants are making changes “around the edges,” Whelan said.
“Office construction is falling off a cliff,” she said. “All that work going into a new build is going into renovating space now. Very few will take a risk with the way the debt market is now.”
Lease renewals represent the real trigger for investments as owners and occupiers rethink their space needs. Those who move choose better spaces and build out more collaborative areas, Whelan said, using the shift to treat new offices as a blank space to change. A new CBRE survey of 185 office tenants found that just 9% of firms plan to occupy the same office portfolio over the next three years; 52% expect to contract and 39% expect to expand.
“Our workplace strategy group, and occupancy insights group, have never been busier because of everybody trying to understand what they should be doing,” Whelan said. “They are looking to test and then pull the trigger.”
CBRE just opened a new office in Richardson, Texas, using its Workplace 360 concept, which does away with dedicated desks.
The upgrades Whelan’s team is seeing can be broken down into three groups: physical elements of space, such as more conference rooms and collaborative space; digital elements of space, such as apps to order coffee, wayfind inside a space or book meeting rooms to meet the increasing need for employee experiences; and human elements of space, such as better air filters and health and wellness features that can be marketed to prospective clients. Landlords are trying to productize the buildings, Whelan said, and create other services and revenue streams.
Hayat also said a key shift has been the end of what she calls the “seas of desks,” as firms eschew the one-desk-per-worker ratio in favor of more social and collaborative spaces.
These demands show a sharp departure from a pre-pandemic focus on more frivolous features, like the games and beer kegs of early WeWork spaces.
“This isn’t Field of Dreams. If you build it, they won’t necessarily come,” Iger said about the turn toward more serious amenities. “There’s a time and place for shiny objects, like the basketball court.”
Not every tenant making a switch has focused on renovations. Whelan said corporate shifts to flex space to shrink their footprint and save money is also a very popular option, as is landlords and property owners converting existing offices to flex options. CBRE’s survey found that 51% of companies plan to make flex space a “significant” part of their portfolio in the next two years, versus 17% who say the same right now.
“Real estate has never moved quickly. That’s the nature of the beast,” Whelan said. “Frankly, it never had to, with long-term leases. And the pandemic turned that on its head. It’s an inflection point, and you need to do it or buildings will just become obsolete.”