In 1931, glass bottles of sparkling soda began rolling off
the assembly line at the Coca-Cola bottling plant in downtown Indianapolis.
It’s unlikely that the factory’s architect gave much thought to the possibility
that shifting consumer habits would make the glass bottle a relic within a
couple of generations.
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Instead of slipping into obsolescence, the factory went on
to have multiple lives. After the Coke factory closed in 1971, the building was
briefly used to house Indy 500 race 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 give the future much
thought, but today, they don’t have the same luxury. A combination of pandemic
disruptions and constantly changing technology has brought the hazy, distant
horizon much closer.
As a result, a growing number of projects are racing against
the clock as profitability and utility are squeezed into the ever-shortening
life of a commercial building. Statistics illustrating the acceleration of
building life cycles are scarce, but experts in the industry are starting to
take heed.
“The cycle of changing is becoming shorter,” said Jefferson
Duarte, associate professor of real estate finance at
Rice University.
Projects that developers once could have collected rents on
for half a century or more don’t allow that anymore.
“Twenty years ago, we didn’t think about it,” Duarte said.
There was just an assumption that an office building would
still be functioning a century later. Some still are. Few developers think the
Empire State Building is going anywhere soon as it approaches 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 spots where short shelf life would not be an issue.
“You could build a barn in Midtown Manhattan and you’d fill
it up, because that is such a prime location,” said John Gallander, an
independent real estate consultant in Costa Mesa, California, who has overseen
commercial development portfolios throughout his career.
Developers are thinking as much about the future as they are
about the present, said Christopher R. King, president and chief executive of
DPC, a commercial property developer based in Denver. DPC just opened a
250,000-square-foot office development in Phoenix and hopes to hold on to it
for 6 to 10 years.
King echoed the concerns of many in the industry that the
pandemic had accelerated trends that could shorten the lives of buildings.
Consumer and worker needs are changing more quickly than they used to, driven
by technology, shifting supply chains and expectations of greater amenities.
Such rapid cycling has been common in retail and food service, but it is
relatively new to commercial real estate.
This shortening shelf life has left architects, developers
and investors in a conundrum: How do you build for today without becoming
obsolete tomorrow?
“I think we are being forced to think about it now,” King
said, adding that his firm is trying to peer into the future by looking at
things as diverse as parking garages, office density and ventilation
technology.
“Everybody in the industry is talking about it but sort of
circling around it,” said Gilles Duranton, a real estate professor at the
University of Pennsylvania’s Wharton School. “There are all sorts of questions
but few answers.”
The core problem is that commercial construction is an
industry producing highly durable goods in a world that is asking for greater
flexibility with changing tastes and economic conditions, Duranton said.
He added that the industry would have to address the
shortening life span through a blend of approaches, including modular elements
and construction methods that would let buildings be disassembled or demolished
easily.
“Sometimes the right thing will involve tearing things down
and rebuilding from scratch,” Duranton said.
The acceleration of the natural progression in office space
is similar to what has been happening for decades with sports stadiums and
malls, which reach the end of their lives much faster than in previous
generations, said Gallander, the real estate consultant.
Developers, though, are in a bind. If they stock an office
building with too many specific amenities, they run the risk that the latest
technologies will quickly become outdated.
(Fax-friendly offices of the 1980s
and ’90s with numerous phone hookups come to mind.) But if they don’t include
enough amenities, they take the chance that potential tenants might look
elsewhere.
In some ways, the tenant can save the developer, Gallander
said. During the rise of the internet in the late ’90s, for instance,
developers weren’t ready to address the growing need for connectivity. But in
many cases, tenants pushed ahead with redesigns (most leases allow for liberal
office redesign) and additional amenities to meet the challenges of an
increasingly wired world. And most law firms transformed the layouts of their
offices to adapt to shifting technological needs. That may happen again, he
said.
The shorter life spans of buildings may force developers to
recoup their money faster by selling earlier than planned, Gallander said.
“You may be looking to hit the exit gate after 3 to 5 years
instead of 7, 10, 15 years,” he said.
Raising rents is not an option, he said, because the higher
cost could push tenants to lower-price alternatives. Developers may also
explore other ways to recoup their investments faster by taking on partners.
At its peak in 1950, the Coca-Cola bottling plant in
Indianapolis employed 250 workers and turned out 2 million fizz-filled bottles
of Coke a week. Now, it is home to the Bottleworks Hotel, the center of a
mixed-use development that opened in late 2020 with the hopes of rejuvenating a
neighborhood.
The developer of the site, Hendricks Commercial Properties,
said the pandemic had shown the value of diversification as a bulwark against
shorter building life spans. No one could have predicted that a havoc-wreaking
pandemic would make gathering places so unappealing, at least in the short
term. But by having a mix of offices, retail, hotel and other uses, the risk
for Hendricks is spread out. The Bottleworks development has an eight-screen
movie theater, for instance, but also a tech incubator.
The move toward unloading properties quickly may be
accelerating, said Gavin Thomas, vice president of development at the firm, but
Hendricks is in it for the long game.
“Hendricks’ timeline is not a three- or 10-year-horizon,” he
said. “It is much longer than that, and that changes the dynamic and criteria
on return perspective.”
But the specter of unanticipated change will color future
projects.
“Going forward, I’ll be asking how much flexibility we
have,” he said.
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