One of the greatest sights of New York has recently been restored to its former glory. The Empire State Building Company devoted $550 million to making the Empire State Building, built 85 years ago, fit for the future. The owners had 6,500 windows replaced, the cooling systems modernised and the rest of the building technology brought right up-to-date – all so as to keep a good one million square metres of office and retail space attractive to tenants. The world-famous Empire State Building is not the only such case: the owners of many other ageing office properties are preoccupied by the question of how to adapt their buildings to the demands of the present and the future. This can become a challenge as early as ten years after a building has been put up, says Marcus Mornhart, who is in charge of the German office-letting market for the property consultants Savills. What is more, the ageing process has accelerated. “As far as office properties are concerned,” Mornhart explains, “more changes happened in the 20 years between 1990 and 2010 than did between 1970 and 1990.”There are many reasons for this development. Andreas Pohl, Chairman of the Management Board of Deutsche Hypo, identifies one of them: “Users today expect flexible office solutions.” Indeed, the traditional cubicle office is no longer the norm: increasing numbers of companies prefer open-plan office concepts, and even these do not remain the same for the duration of a lease period but are able to adapt to changing needs, such as new team structures.
In addition, companies have realised that the quality of the workplace and the working environment is a crucial factor in attracting talented young professionals. These are people who often do not place great value on a prestigious private office but want to work flexibly. For team-focused projects, they want an open-plan office, while for concentrated work on preparing a presentation they need a quiet, separate room. However, far from all office buildings, as presently structured, are in a position to meet these requirements. In many cases, they have also been overwhelmed by the onward march of technology. “Flexible partition walls, false floors and adequate ceiling height” are just some of the urgently needed features listed by Ignaz Trombello, Head of Investment Germany at the Colliers International consultancy in Düsseldorf. If a property does not meet these requirements, its owner will soon be facing an uphill struggle. “Existing properties are in competition with newbuilds, and they have to meet present-day tenant demands in full to stand any chance in the market place”, observes Marc Schömbs, who has overseen several large regeneration projects as Partner and Managing Director at the consultancy Drees & Sommer. Therefore, this is his appeal to owners: “Especially in the case of properties that are getting on in years, it is important to start thinking at an early stage about the direction that your medium- and long-term strategy should take.” This appeal is being heard loud and clear: according to a survey by Hochtief Projektentwicklung, a total of 730,000 square metres of floor space in the seven biggest German property locations underwent refurbishment in 2014, more than ever before. Office space accounted for 42 percent of that volume. There is also a great need for regeneration work in other countries, according to Matthew Cutts, Global Sector Leader Financial Institutions at the Arcadis consultancy: “Major cities in Europe have a large stock of outdated office buildings, which offer huge potential for investors to boost yield through extension, redevelopment and repositioning.”
A challenge for owners
What is more, a property does not have to be anything like as old as the Empire State Building before it needs such repositioning. The MesseTurm in Frankfurt, designed by the internationally renowned architect Helmut Jahn, has not yet marked its 25th anniversary, and yet it has already undergone a thorough facelift: between 2010 and 2014, its owner, GLL Messeturm Holding, had the 257-metre-tall office tower completely refurbished, with the focus on improving its energy efficiency. Once the MesseTurm had secured Gold sustainability certification under the American LEED system, GLL then sold it to investment funds managed by Blackstone. However, it can also be worthwhile for an owner to spend money on office buildings in less prominent locations. This is illustrated by the office complex built in 1992 on Adalperostrasse in the Munich district of Ismaning, which belongs to the open-ended real estate fund UniImmo: Europa. After the main tenant moved out, causing the vacancy rate to rise to 90 percent, the people in charge at Union Investment opted for a thorough refurbishment. At a cost of €6.5 million, they had the outdoor areas and inner court-yards redesigned, an additional parking deck built on, fire-safety measures updated and the floor layout optimised so that it now meets a wide variety of user requirements.
The effort has been worth it: even before the building work is completed in the first quarter of 2015, the occupancy rate has risen to more than 80 percent. Real estate specialists talk of a “manage to core” strategy in such a case: value-enhancing measures turn a secondary asset into a property that is sought after by both users and investors. In this respect, the refurbishment approach complements Union Investment’s strategy of rejuvenating its portfolio. As Reinhard Kutscher, Chairman of the Management Board at Union Investment Real Estate GmbH, emphasises, this rejuvenation process “is active risk prevention and promotes the permanent optimisation of the portfolio”. Accordingly, in the most recent past the company has concentrated on acquiring newbuilds and development projects, while older portfolio properties have been sold. As a result, the portfolio of properties acquired in the past three years is, with an average building age of about six years, a good eleven years newer than the portfolio sold in the same period. This has caused the average economic age of all property assets in Union Investment’s open-ended retail funds to fall to below ten years old.
euros per square metre – the professional estimate for modernising older buildings.
However, regeneration is not always possible. “A substantial proportion of older office buildings are not suitable for conversion”, Ignaz Trombello of Colliers International concedes. This may be due to a poor location, but it is mainly a matter of whether certain structural conditions exist. For example, in order to create a false floor, which is essential for modern cabling, you need adequate ceiling height. “The German state of North Rhine-Westphalia, for one, prescribes a clear ceiling height of three metres for office space n excess of 400 square metres”, Trombello explains. Therefore, if an old building can offer only three metres, there is no way of absorbing the loss in height caused by the false floor – which makes regenertion a non-starter.
Other stumbling blocks, according to experts, are fire-safety and – especially for open-plan office concepts – acoustic requirements. If it is impossible to find a solution to these, you have to look for other ways, advises the Drees & Sommer expert Schömbs. One might be a change of use, such as turning the building into a student hostel. Another might be to offer a low rent to attract a less demanding tenant, but sometimes demolition is the only option left. “However,” Ignaz Trombello stresses, “sometimes the basic structure of an older building can be good.” Proof of this is one of Düsseldorf’s most prominent office buildings: the former Horten head office, built in 1961 according to plans by RKW Rhode Kellermann Wawrowsky, which is now known as Seestern 3 and is part of the portfolio of Union Investment’s UniImmo: Europa open-ended real estate fund. The department-store boss Helmut Horten had been inspired by the American-style open-plan office, which was considered state-of-the-art at that time. “The concept – flexible, clear and linear – was as pioneering then as it is today”, says Oliver Sommer, Rhine-Ruhr region manager for Goldbeck Bauen im Bestand GmbH. This property was modernised in 2013/14 by Goldbeck on behalf of Union Investment.
metres – the ideal grid for facades of modern office buildings. If windows are arranged this far apart, rooms can be laid out flexibly.
Keep tomorrow in mind
There is another icon of post-war architecture in Düsseldorf that offered good preconditions: the former ThyssenKrupp headquarters, which was modernised in recent years as the “Dreischeibenhaus” by Momeni Projektentwicklung and Black Horse Investments and has been home to the head office of the Alltours tour operator since autumn 2014. Here too, it proved possible to achieve a high level of flexibility, with connected areas of floor space for large users and smaller office units as well. The owners spent more than €200 million on the regeneration of this 35,000-square-metre high-rise building. This demonstrates that substantial investment is necessary to knock an older building into shape. Even a few years after completion, you need to put in €150–300 per square metre, says Martin Hofmann, Head of Real Estate Advisory Services at the international property consultants Jones Lang La Salle (JLL) Germany; for older buildings, you have to work on the basis of as much as €500–700 per square metre. Banks, too, include these costs in their calculations, as the Deutsche Hypo chief Andreas Pohl explains: “We take account of the amount that will have to be invested during the lease period to achieve a sustainable rent in the long term.” “Structural conditions play a substantial part when it comes to valuation”, confirms Achille Simo, valuation specialist at JLL.
As developers, we need to create in buildings right now what future changes in technology will require.
He says owners have to understand that they will have to charge a lower rent when they relet, unless they invest at an early stage in maintaining the building’s standard. Such investment can certainly be worthwhile: “Refurbishment,” according to Matthew Cutts at Arcadis, “offers an excellent opportunity in most financial centres to improve an older office building’s yield and performance. ”The only problem is: what precautions have to be taken to ensure that modernisation work does not itself become out-of-date a few years on? According to the JLL expert Hofmann, it could happen at some point, for example, that new developments in communications technology render false floors redundant. “As developers, we need to create in buildings right now what future changes in technology will require”, responds Rüdiger Schulz, a manager at Hochtief Projektentwicklung. “To achieve this, we have to work with the planners to incorporate a basic structure for the building and its technology that is as flexible as possible, right from the outset.”
In practice, this means they provide for a facade grid of 1.35 metres and a room depth of 13.60 metres. In addition, allowance has to be made for an adequate number of staircases, and the fire-safety concept has to be designed to take account of different configurations of space. Nevertheless, there are still users to whom an office building’s atmosphere matters more than whether it has perfect fittings. The Chilehaus in Hamburg’s historic commercial district, for example, has been carefully modernised several times, but is still regarded as one of the most attractive office properties a good 90 years after it was put up. “For such an outstanding building as this, the tenant is willing to compromise and to adapt himself to the building”, says Marcus Mornhart of Savills. What applies to the Empire State Building in New York is also true of this flagship commercial building in northern Germany, Mornhart believes: “The Chilehaus will never grow old.”