Archives for June 2019

For example, Fairfax County, Va. was struggling with 18 million sq. ft. of unoccupied office space. A local planning workgroup looked at the opportunities for recycling old office buildings into apartments, schools, co-working spaces and food incubators and recommended zoning changes that did not require changes to land use plans. In 2015, the county’s Board of Supervisors approved the recommendations, but with the caveat that the buildings be in an area zoned for mixed uses or industrial.

Since then, the county has seen old office buildings converted to schools, live-work units and apartments, with more adaptive reuse projects in the works.
A five-story, 99,350-sq.-ft. office building located across the street from Seven Corners shopping center in Falls Church, Va. was acquired by the local school district for $9.37 million, or about $94 per sq. ft.  The building was redesigned by Lauren Perry Ford, an architect at Cooper Carry, to house Bailey’s Upper Elementary School for the Arts and Sciences, which now serves 764 students.
Meanwhile, in Springfield, Va., Immanuel Christian School, a private school offering classes from kindergarten through eighth grade, plans to expand its curriculum to high school at a nearby office building in Alexandria, Va. The school leased 27,000 sq. ft. of former office space to convert to classrooms and administrative offices by the upcoming fall quarter. It has plans to acquire the entire building.
In Falls Church, Va., a 10-story, 173,000-sq.-ft. office building that had been empty for about four years was converted to rental housing, which is in high demand in the area, according to Sophia Fisher, a senior planner in the Fairfax County Planning Department. The project by local developer Cafritz Interests, which specializes in adaptive reuse, completed the conversion of the office space to 200 live-work units known as e-lofts Alexandria in 2016.
Cooper Carry architect Steve Smith notes that building urban schools, especially high schools, is challenging for school districts, since they typically require 30 to 40 acres for sports and other activities. It can be difficult to assemble that much land in an urban environment. His firm redesigned a 56-acre IBM campus, with an 11-story, 507,093-sq.h-ft. office tower in Atlanta, as North Atlanta High School. That project, which also features a scenic lake, assembly building and 942-car parking deck, also converted existing, on-grade parking lots into athletic venues for baseball, softball, football, tennis and track.
Smith recently redesigned a 13-story, 625,000-sq.-ft. office building in Old Town Alexandria, initially built in 1970, into a multifamily mixed-use property. The project, by local developer Perseus TDC | Real Estate Investment & Development, is currently under construction and will include 520 apartment units; 34,000 sq. ft. of retail space; and a variety of amenities to appeal to young professionals, including a rooftop pool and indoor dog run.
There are costly challenges to recycling obsolete buildings to other uses, according to Smith, but also tremendous advantages over new construction, including quicker delivery to market than ground-up development, typically with significant savings over projects started from scratch. There is also often a design advantage in the case of historic buildings, which often have unique design elements.
In the case of the Alexandria office building at 200 Stovall, which was rebranded The Foundry, Smith says, “The building has good bones, great views and was in an excellent, walkable location nearby a Metro station. But its life as an office building was over,” he adds, noting that low ceilings and no parking made it unmarketable as office space.
Converting the building to residential use, however, presented design and structural challenges and hidden issues in walls. The structure is oversized for residential at 120 ft. by 378 ft. and was designed on a 20 by 20 grid with lots of internal columns, making it difficult to break into apartment units. It also had asbestos that had to be removed and contained wiring and plumbing inconsistent with residential use.
The building’s extra width was overcome by creating large balconies that are recessed under the roof into units. Unneeded elevators were removed and their shafts filled with amenity and storage spaces.
The first two levels were combined to provide higher ceiling height for retail space, and three levels of parking were added on top of the building. Other structural modifications were required to meet today’s building codes and strengthen support for the three parking levels and ramps.
This included the introduction of sheer walls to separate units from balconies and an extra rebar and an additional slab with insulation in between were added to the existing slab on parking levels.
The costs for adaptive reuse projects can be estimated fairly accurately, Smith says, but developers/investors need to leave wiggle room in proformas for unexpected contingencies.
For example, it’s unknown what will be found inside the building walls until they are opened up. But some potential issues—for example, asbestos—can be anticipated based on when the building was construction.
Meanwhile, while historic buildings are generally well built, Smith says that developers/investors should expect at the very least to replace electrical and plumbing systems to meet code requirements.
Rezoning may also be required, depending on the building’s location.
Minneapolis-based architect Ryan Schroeder, a principal at PlanForce Architecture + Design, says that his firm has redesigned old office buildings as alternative learning facilities, school administrative offices and an indoor trampoline park.
No matter what the new use is, these types of buildings can be acquired for significantly less than replacement cost due to a dip in their marketable lease rate or abandonment, according to Schroeder.
Schroeder also suggests that old office buildings can be good candidates for various retail services, noting that a Minneapolis developer recently converted an office building into a doggy hotel.
Class-B and -C office space is also being converted to industrial use to meet high demand for “last mile” industrial facilities in urban centers, according to Pete Quinn, Indianapolis-based national director of industrial services, USA, with real estate services firm Colliers International. While this would have been considered a ridiculous proposition 10 years ago, he says that office landlords dealing with falling occupancy rates are increasingly undertaking such conversions.
Developers are also converting office buildings into hotels. Two examples include Hyatt Place at 1522 K Street in Washington, D.C., a former office building that Cooper Carry redesigned as a hotel, and an adaptive reuse project by Indianapolis developer Kennmar, which is in the process of converting a downtown Indianapolis office building at 141 E. Washington St. into $25 million Marriott-branded boutique hotel.
The rise of co-living, another sharing economy concept, offers additional opportunities for investors, especially in cities in the throes of a housing crisis that forces young adults and retirees out of the housing market. For example, The Collective, a London start-up, converted an old office building in London into the largest co-living building in the world, The Collective Old Oak, which provides 550 beds.
By: Patricia Kirk (NREI)
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(Bloomberg Opinion)—The Congressional Budget Office has just released its projections for the U.S. federal budget during the next 30 years. The picture is one of steadily rising deficits. Federal government borrowing now amounts to about 4.2% of gross domestic product each year. By 2049, the CBO predicts, that will more than double, to 8.7%:

There’s No Catching Up

Only a small portion of these deficits will be due to tax cuts; the CBO projection expects that individual income taxes rise substantially as a share of GDP. Nor will it be due to government profligacy; CBO predicts that discretionary spending will shrink substantially relative to the size of the economy.

Instead, the growth in deficits is mostly about two things. First, government health care spending is projected to grow, which is partly due to population aging and partly because the CBO predicts that medical costs will keep going up.  Second, and even more importantly, the CBO predicts that interest rates will rise, forcing the government to spendmuch more on simply paying interest on its debt. The federal government now pays an average of 2.4 % to borrow; in three decades, the CBO predicts that this will rise to 4.2%.
If true, that will cause an exponential increase in the amount the government has to pay for debt service:

The Burden of Debt

By the 2040s, the CBO projects, the primary budget deficit — the gap between non-interest spending and tax revenue — will stabilize at less than 4% of GDP, but net interest will keep on rising. This is because as the government borrows more and more to cover its interest payments, the amount of debt that’s accruing interest goes up.
In many ways, this is actually a very conservative forecast. The CBO assumes that the U.S. will raise taxes, instead of cutting them as it has done repeatedly. It assumes no future recessions requiring large increases in the level of federal debt for stimulus purposes. And most importantly, it assumes no big future increases in discretionary spending and no new big entitlements. If Medicare For All or the Green New Deal ever make it through Congress, the projected federal debt will be much, much higher.
Why is this a problem? If the government decides to cut deficits by raising taxes even more than the CBO predicts, it could slow the economy. If it decides to let the debt grow, it will have to borrow more and more in order to cover its increasing interest, and both borrowing and interest costs will snowball. That could provoke what the CBO calls a fiscal crisis — a private investor panic about the government’s ability to repay its debt, causing a drop in bond prices that render financial institutions insolvent and causing an economic crisis.
The government thus has a good reason not to let debt spiral out of control. And the easiest way to keep that from happening is for the Federal Reserve to cut interest rates to zero and keep them there. As the government replaces its old, higher-interest debt with new, lower-interest debt, its yearly interest payments would go down, until finally they dwindle to nothing at all. Doing this would stabilize the deficit, and even open up fiscal space for big new spending initiatives on issues like climate change.
This situation — where the central bank holds rates at or near zero in order to keep the government solvent — is known to economists as fiscal dominance. Arguably, Japan has been in this situation for years:

An Interest Rate in Name Only

Some argue that Japan’s interest rates are low for natural reasons, mainly because of population decline and slow productivity growth. But Japanese central bankers’ periodic intentions to raise rates have probably been restrained by the country’s enormous public debt. Even if they wanted to, Japanese policy makers couldn’t raise rates very much without the specter of government insolvency.

Most macroeconomists think this isn’t much of a problem. Inflation is the traditional reason to raise rates, and Japan doesn’t have much of it. But there’s a possibility that long periods of low interest rates have negative consequences that don’t appear in traditional economic models. For example, low rates might encourage the survival of unproductive zombie companies, or it could allow monopolies to dominate markets with cheap borrowing. These potential downsides are not well-researched or well-understood yet.
The U.S. might also not be the same as Japan. Its investors could be more inclined to abandon the country for greener pastures if rates stayed too low for too long. With population expected to grow instead of shrink, the U.S. also might not be able to sustain zero rates forever without eventually risking inflation.
So the U.S. shouldn’t stride confidently into a brave new world of fiscal dominance just because Japan hasn’t yet collapsed. Just to be on the safe side, other measures to constrain deficits — reducing excess cost growth for health care and reversing recent tax cuts — would be prudent. But should these efforts turn out to be politically impossible, get ready for permanent zero interest rates.
By: NREI
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Hines, the real estate investment firm founded by billionaire Gerald Hines, is betting on increasing tenant demand for flexible workspaces.
The Houston-based firm — which oversees $121 billion in assets — is launching a new business, dubbed Hines Squared, to provide premium co-working and flexible office space in buildings it owns.

“This concept arose from our realization that customers needed something different to the long-term leases that landlords traditionally offer,” Hines Innovation Officer Charlie Kuntz said in an interview. Hines Squared hopes to provide lease flexibility that accommodates a tenant’s growth or shrinkage, as well as space to expand in new regions by its clients.
“We’re excited because if we can get this right, we’ll be able to solve problems faced by a lot of companies,” Kuntz said.
Hines is among the biggest landlords to jump into the business, where the rapid growth of WeWork Cos. has prompted real estate owners like Blackstone Group LP and Tishman Speyer to provide their own flexible-space offerings.
Industrious will serve as one of Hines Squared’s operating partners for these spaces, which will be called “The Square.” Its first two locations are slated to open by the end of the year in 717 Texas in Houston and The Kearns Building in Salt Lake City.
“We’ve found that the deeper the integration between the landlord and the workplace provider, the happier and more productive the employees of a building’s occupants will be,” Industrious’s Chief Executive Officer and co-founder, Jamie Hodari, said in an interview. For example, he said, tenants within a property can use shared meeting rooms when their own are at capacity.
New York-based Industrious provides amenities and other services alongside its co-working offerings. Last year, it raised $80 million from investors led by Riverwood Capital and Fifth Wall Ventures, the latter of which counts Hines among its investors. Industrious has existing partnerships with landlords including Blackstone’s EQ Office, Jamestown LP, and Macerich Co.
Convene, which provides flexible working, meeting and event spaces, is Hines’s other preferred operating partner. The New York-based company last year raised $152 million from investors including Brookfield Property Partners LP and RXR Realty, both of which have added the startup to their tenant rosters in buildings that they own.
Hines Squared is in the process of launching in cities including Atlanta, Boston, Denver, New York City, San Francisco and its surroundings, as well as Washington, D.C. It also intends to leverage Hines’s global footprint elsewhere in North America as well as Europe, Asia and South America.
By: NREI
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