As Buildings’ Life Spans Shrink, Builders Attempt to Modify

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As Buildings’ Life Spans Shrink, Developers Try to Adjust

In 1931, glass bottles of soda rolled off the assembly line at the Coca-Cola bottling plant in downtown Indianapolis. It's unlikely that the factory's architect thought about the possibility that a change in consumer habits would make the glass bottle a relic within a few generations.

Instead of becoming obsolete, the factory had multiple lives. After the cola factory closed in 1971, the building briefly housed Indy 500 racing cars and then served as a school bus garage for decades before becoming a 139-room boutique hotel last year that anchored a new entertainment district.

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

As a result, more and more projects race against the clock as profitability and value drift into the ever shorter lifespan of a commercial building. Statistics that illustrate the acceleration of building life cycles are rare, but industry experts are starting to pay attention to them.

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

"We didn't think about it twenty years ago," said Professor Duarte. The assumption was that an office building would work a century later.

Some still are. Few developers believe the Empire State Building will be somewhere soon as it approaches its centenary by the end of the decade.

A premium spot or landmark status can overcome obsolescence: Areas like Midtown Manhattan or Chicago's Magnificent Mile seem to remain coveted spots where a short shelf life is not a problem.

"You could build a barn in Midtown Manhattan and fill it up because it's such a prime location," said John Gallander, an independent Costa Mesa, Calif. Real estate consultant who has overseen business development portfolios across his Career.

Developers think of both the future and the present, said Christopher R. King, president and chief executive officer of DPC, a Denver-based commercial real estate developer. DPC has just opened a 250,000-square-foot office building in Phoenix and is hoping to keep it for six to ten years.

Mr King reiterated the concern of many in the industry that the pandemic had accelerated trends that could shorten the life of buildings. Consumer and worker needs are changing faster than before, driven by technology, changing supply chains and the expectation of greater convenience. Such fast cycling was common in retail and hospitality but is relatively new to commercial real estate.

This shortened shelf life has puzzled architects, developers and investors: How do you build for today without being out of date tomorrow?

Updated

Feb. 23, 2021, 11:19 a.m. ET

"I think we are being forced to think about it now," said King, adding that his company is trying to look to the future by addressing things as diverse as parking garages, office density and ventilation technology.

"Everyone in the industry is talking about it, but somehow revolving around it," said Gilles Duranton, 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 that makes highly durable goods in a world that demands more flexibility with changing tastes and economic conditions, Professor Duranton said.

He added that industry would need to address lifespan shortening through a mix of approaches, including modular elements and construction methods that would make buildings easily dismantled or demolished.

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

The acceleration of natural progress in office space is similar to what has been happening for decades in sports stadiums and shopping malls, which are reaching the end of their lives much faster than previous generations, real estate advisor Gallander said.

Developers are in a bind, however. If you have an office building stocked with too many specific amenities, you run the risk of the latest technology quickly becoming outdated. (Fax-friendly offices of the 1980s and 1990s with plenty of phone lines come to mind.) However, if they don't have enough amenities, they take the chance that potential tenants will look elsewhere.

In a way, the tenant can save the developer, Mr Gallander said. For example, during the rise of the internet in the late 1990s, developers were not ready to meet the growing need for connectivity. In many cases, however, tenants have pushed for redesigns (most leases allow for a liberal office redesign) and additional amenities to meet the challenges of an increasingly wired world. And most law firms have changed the layout of their offices to accommodate changing technological needs. That can happen again, he said.

The shorter lifespan of buildings could force developers to get their money back faster by selling earlier than planned, Gallander said.

"You may want to get to the exit gate after three to five years instead of seven, ten or 15 years," he said.

Increasing rents is not an option, as the higher costs could force tenants to choose cheaper alternatives. Developers can also look for other ways to get back their investments faster by acquiring partners.

At its peak in 1950, the Coca-Cola bottling plant in Indianapolis employed 250 people and produced two million soda-filled bottles of Cola per week. Now here is the Bottleworks Hotel, the center of a mixed-use development that opened in late 2020 with the hope of rejuvenating a neighborhood.

The property's developer, Hendricks Commercial Properties, said the pandemic had demonstrated the value of diversification as a bulwark against shorter lifetimes. Nobody could have predicted that a devastating pandemic would make meeting places so unattractive, at least in the short term. However, a mix of office, retail, hotel, and other uses will spread the risk to Hendricks. The Bottleworks development includes, for example, a cinema with eight screens, but also a technology incubator.

The move to fast real estate dumping could accelerate, said Gavin Thomas, vice president of development for the company, but Hendricks is in for the long game.

"Hendrick's timeline is not a three or ten year horizon," he said. "It's much longer than that, and that changes the dynamics and the criteria for the return perspective."

But the specter of unexpected change will shape future projects. "In the future I will ask how much flexibility we have," he said.

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