By Monica Moreira Audette, AIA, LEED AP, Associate Partner and Senior Project Manager at Margulies Perruzzi
A lot more goes into renovating an older Class B building into a Class A than just adding a coffee bar or flat screen TV in the lobby. If it were that easy, all Class B building owners would upgrade. A big part of the decision to renovate a Class B building is the owner’s appetite for risk and how far they are willing to go to achieve a higher rate of return on their property.
It is not a decision any owner can make quickly. Owners will have to methodically weigh the pros and cons of trading the safety and stability of a Class B building for the cachet of Class A. The indicators are nearly endless – tenant demand, the economic forecast, sector growth, businesses that are expanding and/or contracting, emerging space trends (open floor plans, high-end amenities), and changing work styles that require more flexible space.
Office, industrial, retail, warehouse and biotech space have different conditions and variables that cannot be compared across the board. For instance, renovating warehouse space in one region makes sense to accommodate the demand from large retail tenants like Amazon that have specific needs, while in another market it would be a poor investment. The same goes for biotech space – upgrading buildings in a bullet-proof market like Cambridge is a no-brainer but biotech tenants have very specific needs that make renovating a building a costly endeavor.
What to Weigh
Given that the conditions can vary so dramatically from market to market, owners need to look closely at both the micro and macro conditions before considering future renovation plans. They should avoid basing their decisions on what their neighbors are doing given that the building condition, access to capital and the type of tenant improvements will differ.
Converting Class B buildings to A in fail-proof or constrained markets reduces risk. Property owners and managers should pay close attention to market research for leasing trends and supply and demand. The vacancy rate of a property is a crucial factor in the decision-making process for owners who may want to stagger improvements.
Class B buildings in markets where there are high vacancy rates may have a better chance at adding value by making minor changes like upgrading mechanical and operating systems to increase their building’s efficiency rather than a full-scale renovation. If the building is in a market where there is weak demand for Class A space, staying put in Class B until there is a shift could be the best strategy.
Property owners whose buildings have not been properly maintained or have fallen into disrepair are unlikely to be able to justify retrofitting buildings with touchless, digital technology that will play a big role in landing a tenant. Property owners who are planning to retain assets for the long-term have more financial cushion to make investments that will pay off in the future, increasing rents and elevating the class of the property. Those in the game for the short-term who do not have access to capital will favor less costly facelifts over renovation, leaving the new owners the opportunity to add value.
Building owners and managers should enlist a team of experts who can assist in determining the best course in repositioning office buildings. Evaluating the real estate market, comparable properties, and tenant demand will provide a solid starting point to formulate a plan for repositioning a commercial property.
A Medical Makeover in West End
When asset manager DWS Group decided to renovate 50, 60, and 62 Staniford Street in Boston’s West End neighborhood to transform the 70’s era complex into a first-class medical office building they hired Margulies Perruzzi to outline the process from navigating construction with tenants in the building to the Boston planning process.
DWS’ goal was to improve the tenant experience, increase access and add high-quality building features near medical/research institutions such as Massachusetts General Hospital, Shriner’s Hospitals for Children, and Mass. Eye & Ear to attract new tenants.
We evaluated every detail and devised a design scheme that included reducing disruption to tenants to securing city approvals to increasing the building’s Planned Development Area.
Our strategy included connecting 50 and 60 Staniford Streets which increased the ground floor and first floor by 20,000 SF. It also created new space for medical office, dry research, and retail tenants.
The Staniford complex now features a 10-story medical office tower and a new, two-story medical office building with space for retail tenants. The investment by DWS created a premier medical/office space, increasing the value of the complex, and improved access to high-quality space ideal for medical office/retail users.
Article featured in Banker & Tradesman.