Archives for 2024

Data centers are in high demand by many industries, including agriculture, banking, inventory, defense, mining, and healthcare. According to a recent report by Newmark, data center demand will double by 2030. Given the excess office stock in the US, adapting an office building (or another underutilized building) can be a win-win solution. However, the data center conversion process can be challenging due to the complex infrastructure requirements of data centers. Below is a brief overview of these requirements and how to evaluate a building’s potential for data center use.

Understanding Data Center Leasing: Capacity & Redundancy
Unlike most asset classes, in which tenants lease square footage, data center leases are structured according to power usage along with space rented and related services, like security. Because disruption of service can be catastrophic for data centers and the end-users relying on them, redundancy in power and cooling pathways are critically important. The more sensitive the data, the more redundancy required. Data center tenants pay higher rates for increased redundancy. Lease terms include a Service Level Agreement, or SLA, which specify the uptime, security, and maintenance standards that the data center must meet. The SLA also specifies who is responsible for various costs related to maintaining the standards and who is liable for losses related to disruption. Over 90% of all companies that have lost their data center for 10 days or more file for bankruptcy within one year.

Considerations for Office-to-Data-Center Conversion
A building will be suitable for data center use if it has the capacity to deliver required power and cooling along with the structure and resiliency necessary to ensure adequate space and protection of equipment. These characteristics can be assessed through a well-scoped Property Condition Assessment (PCA) and feasibility study.

Because electrical supply and cooling systems are critical for data centers, a Mechanical-Electrical-Plumbing (MEP) assessment is fundamental. An MEP specialist can confirm electrical capacity for the proposed project, create an inventory of current equipment, assess the condition of each asset and provide a capital budget for deferred maintenance as well as a replacement schedule for these assets. Sometimes, power requirements will indicate the need for relocating or adding a substation to support the project. Electrical systems in data centers must include an uninterruptible power supply (UPS) to provide continuous power nearly instantaneously, in case of power failure. The MEP specialist will assess the UPS and include a replacement cost and schedule according to its condition and useful life. The MEP specialist can also evaluate existing cooling systems, not only for functionality and adequacy but for efficiency. Sometimes, half of the total energy consumption of a data center is used by cooling systems. The MEP specialist can recommend additions or replacements that can boost efficiency and improve NOI. They should also identify the location of existing water lines to avoid critical equipment being located underneath these lines or to develop some sort of secondary containment in case of a leak.

The condition of the roof and building envelope is also of critical importance. As with any building, water intrusion can undermine the integrity of the building envelope and structure. In data centers, however, water intrusion can also damage sensitive equipment, cause short circuits, even start fires—all serious threats to operational continuity. A building envelope specialist should be engaged to evaluate these systems.

In terms of the building structure and space allocation, consider where equipment will be located. Where will the computer room be located? Where will the battery room(s) be located? Is the floor-to-floor height sufficient? Is the structural load capacity of the floors and/or roof sufficient? These are just some of the questions to take into consideration.

Finally, consider climate and seismic resilience. A Property Resilience Assessment (PRA), performed in conjunction with the PCA, can provide insights about the building’s vulnerabilities to severe weather events and natural disasters by incorporating regional climate data with an evaluation of site-specific characteristics. It will also include recommendations for improving the building resiliency.

Moving Forward with Conversion
If you believe your building is a candidate for conversion to data center use, enlist the help of a qualified engineering consultant with expertise in MEP, FLS, building envelope, and building resiliency along with specific experience with data centers. They can assess the existing state of your building and help you identify necessary improvements. Well-scoped, high-quality assessments can provide you with the data needed to make an informed decision about your asset and business objectives.

Source: “Is Your Office Property a Candidate for a Data Center Conversion?”

One assumption about population migration is that people are moving from one major metro to another in search of work and lower living costs, going from gateway cities to the Sun Belt.

As often happens, common assumptions can overlook something significant. In this case, there’s an entirely different twist proven by Census Bureau data, as Hamilton Lombard, estimates program manager of the Demographics Research Group at the University of Virginia, recently wrote. Younger people are moving to small towns and rural counties at rates not seen since, at least, the 1970s.

Through the 1970s, the population size from ages 25 to 44 in MSAs with fewer than 250,000 people or in rural counties began to fall until sometime during the early 1990s when the change in population from migration crossed a zero line and became negative. This continued until early in the 2010s, when at about a loss of 1.5% annually, the trend reversed and started to climb sharply.

By 2023, domestic migration into those smallest MSAs and rural counties hit 291.4 thousand, according to Bloomberg. For the first time since the 1970s, net migration influx into these smaller places was higher than any other metro area size, including the largest, according to Lombard’s analysis.

Slightly broader, two-thirds of the growth in the 25-to-44 population has been in metro areas with fewer than 1,000,000 residents or in rural counties. These population changes aren’t returning to pre-pandemic patterns where 90% of the growth of this group was in the metro areas with more than 4 million residents, which was the trend in pre-pandemic times.

In the early 2010s, only 27% of small metro and rural areas saw growth in the 25-to-44 aged population. Since 2020, the percentage has grown to 63%, although the overall growth of the 25-to-44 age segment was similar in each time period.

As people in this group have moved to rural counties with high natural amenities, they have also become wealthier.

The shift in demographics has some remarkable implications for commercial real estate. One is where housing development could occur rather than popular larger metros in the South and West, which have seen excess inventory push vacancy rates up and rents down.

When looking at these smaller locations, developers might focus on the interests and needs of the 25-to-44 segment, recognizing that they’ve also seen income increases.

Another is whether corporations will be able to enforce their back-to-work plans. With a likely educated and skilled source of labor in these smaller towns, companies will realize that either work-from-home or satellite offices could bring in talent. Having a larger pool of candidates would likely also mean the ability to reduce employment costs.

Source: “Young Adults Fuel Revival of Small Towns and Rural Areas”

Signs are emerging that companies are feeling more confident about their office-leasing decisions, prompting a bump in touring and leasing activity in several U.S. markets.

In New York City, there was about 18.6 million square feet of office-tenant activity on average in 2018 and 2019, according to data from CBRE Group Inc. (NYSE: CBRE). At the lowest point of the Covid-19 pandemic, that plummeted to 3.8 million square feet.

Right now, the firm is tracking 26 million square feet of office requirements in New York, said Paul Myers, vice chairman at CBRE who represents tenants in commercial real estate lease negotiations in New York City.

Since the pandemic, most of the office-leasing activity nationally has been driven by professional-services firms and companies in industries like law and finance — which returned to the office on a more regular basis, and sooner, than other industries. Technology, which had been the biggest driver of office-leasing activity right before the pandemic, has as an industry scaled back its leasing activity significantly since 2020 and has embraced remote work.

But in a metro like New York, office tenants in industries like tech, retail, media and entertainment — which had all been largely absent from the office market in the pandemic’s aftermath — are back in a big way, Myers said.

The uptick in leasing demand may be coinciding with a few broader factors, including a more-certain economy and a bigger push by companies for their employees to be back in the office.

Amazon.com Inc. (Nasdaq: AMZN) made a big splash last month when CEO Andy Jassy said all employees would be required to be in the office five days a week starting in January. The company, however, is not alone in wanting to get more people back to the office more regularly.

“We’re hearing from more and more users of office space … that they’re a little fed up with the uncertainty,” said Michael Lirtzman, head of U.S. office leasing at Colliers International Inc. (Nasdaq: CIGI). “Not only is it an issue of office space, but they can’t plan investment, nor can they plan rent-expense projections, until they have certainty in terms of what they need in terms of their space.”

Commercial real estate tech company VTS Inc., which tracks office leasing demand in several major U.S. markets, this summer said office demand hit bottom in late 2022 or early 2023. It made that determination in July of this year based on what it called a substantial period of stability and growth within the office market, including 12 consecutive months of year-over-year growth in tenant demand, and supporting economic factors.

The firm’s VTS Office Demand Index, or VODI, saw a 17% increase at the end of the second quarter from the same quarter a year earlier and a 34% increase from when it bottomed out in December 2022 and January 2023.

Themes that have been prominent in the U.S. office market since the pandemic — companies taking less square footage and moving into trophy office towers — are still happening, Lirtzman and others say.

The uptick in leasing activity also will not erase the significant headwinds facing the U.S. office market, which continues to contend with record-high vacancy that’s expected to continue to climb and a mountain of debt backed by office towers coming due in the coming years.

But companies today overall have more confidence in their leasing decisions, which may include signing a lease with a longer term compared to the one- and two-year extensions that were hallmarks a couple of years ago.

It’s created a more-positive third quarter for some U.S. markets than what’s been seen since the pandemic. Among markets tracked by Colliers, Manhattan and Dallas had significant positive absorption, at 3.5 million square feet and a little more than 1 million square feet, respectively.

While the national market isn’t seeing the levels of absorption that were common in 2018 and 2019, Marianne Skorupski, director of national office research at Colliers, said certain markets, like some Sun Belt sites, are still proving to be attractive to office users post-pandemic.

Flight-to-quality competition heats up

Space in the most high-profile buildings is filling up fast, prompting a race of sorts to lock down that real estate before it’s gone.

Only 28 million square feet of new office space is expected to deliver in 2024, well below norms, Skorupski said. With hardly any new office construction breaking ground in recent years, that dearth of the newest and most amenitized space could hobble the market in the coming years.

That may not all be bad news, though.

“This is good for keeping the market in check, to allow more organic takeup of the space in existence,” Skorupski said.

Tenants in some places are having to turn to what’s considered Class A-minus or B-plus buildings — space that has largely been ignored and sat vacant since companies began rethinking their office real estate.

That includes newly built speculative towers that broke ground right around the pandemic’s onset that are, perhaps, a block or two off a key transit or transportation corridor or somewhat removed from the best amenities.

“That next tier of buildings is having maybe a renaissance,” Lirtzman said, although he added some tenants are choosing to stay in place to see what options could become available in the coming years.

Companies still struggle to right-size their footprint

Despite companies having a greater sense of confidence about signing a lease, how much square footage is needed remains a tough thing to determine for many occupiers.

It’s been common since the pandemic for office users to negotiate early-term expansion flexibility into their lease agreements, Myers said — something landlords were generally willing to do in a market with little tenant demand. Those types of agreements allowed companies to either take an additional floor at a later time, hold off on building out a floor or even give one back if it wasn’t needed.

Between 2023 and the early part of this year, 45 lease transactions in New York included tenants that took a total of 1.9 million square feet; another 900,000 square feet was added by those groups collectively within a year of signing their leases.

“[It’s] hard to nail down,” Myers said. “People don’t want to make a big mistake on [their] square footage.”

Lirtzman said tenants today are still seeking as much flexibility as they can reasonably get in their leases. Those requests today “are not as extreme” as they were two or three years ago, and companies overall are more firmly committing to space at the outset.

Still, he added, deals are moving more slowly today than they were a year ago as tenants try to get as much flexibility as possible, especially in nailing down what medium- to long-term space needs might look like.

Source: “Office-Leasing demand starts to make a comeback nationallay”

This year’s back-to-school season breathed new life into indoor malls, with a recent report from Placer.ai revealing a significant 7.3% increase in foot traffic compared to the previous year. This surge in popularity wasn’t limited to enclosed shopping centers, as open-air shopping centers and outlet malls also experienced substantial growth during the same period.

This resurgence in mall traffic has not gone unnoticed by industry insiders. Joe Aristone, executive vice president and chief revenue officer of PREIT, makes it his business to closely monitor these trends. He observes that certain retailers continue to strike a chord with the teenage demographic, particularly American Eagle and Abercrombie. Aristone attributes its ongoing success to a winning combination of appealing style offerings and competitive price points, which resonate strongly with young shoppers.

Surprisingly, even Dick’s Sporting Goods, not traditionally associated with back-to-school shopping, has emerged as a major player in this sector. Aristone explains, “Kids are coming in for their sporting equipment and gear and all the things that they need to participate in sports. There’s a lot of athleisure wear that runs through Dick’s, and that’s kind of been a bright spot in terms of what we’ve seen.”

While the back-to-school season has provided a boost to mall traffic, retailers and mall operators are looking beyond seasonal trends to ensure long-term success. Aristone emphasizes the importance of creating compelling reasons for shoppers to visit physical stores in an era where online shopping is ubiquitous.

One strategy gaining traction is the integration of retail and entertainment venues. This approach aims to appeal to a wider audience and encourage longer visits, ultimately translating into increased consumer spending. Aristone notes that alongside traditional food courts and casual dining options, malls are now incorporating entertainment venues like arcades and eat-and-play experiences.

The recent surge in back-to-school shopping demonstrates that physical retail spaces still hold value for consumers. However, Aristone acknowledges that the mall landscape continues to evolve. Lower-tier shopping centers are facing challenges in attracting tenants, while successful retailers are focusing on integrating various distribution channels, such as buy-online-pick-up-in-store options.

As the retail landscape shifts, some mall operators are opting for a more focused approach. PREIT, for instance, has reduced its presence in the Philadelphia market from eight malls to just five, concentrating on high-performing locations.

Despite these changes, the future looks promising for well-adapted malls. PREIT reported a 6.7% increase in traffic across its portfolio in August compared to the same month last year, suggesting that the right combination of retailers, experiences, and locations can still draw shoppers to physical stores.

Source: “How Malls Are Adapting to Ensure Long-Term Success”