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Commercial Real Estate

Charlie Myers: Retrofits—Are They Worth the Investment?

Here's what we've learned from redeveloping our new headquarters along Dallas Parkway.
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Although much of this region’s construction news has focused on ground-up, new, multi-million dollar developments commercial retrofits represent 61 percent of all construction projects today, according to recent McGraw Hill data. With a median age of 32 years, these commercial buildings have smaller footprints, utilize more energy, and have little or no technology infrastructure, as half of them were built before 1980. Given their challenges, it begs the question: Are retrofits worth the investment?

Of course, new construction enables one to tailor the project for the user, which is a major advantage. With a retrofit, the value of the location becomes one of the most important “go versus no-go” decisions. That is because other inherent problems with the property often cannot be changed, such as low parking ratios, building ceiling heights, and the footprint itself. Due to this, some users are deterred from considering the retrofit of an existing commercial building no matter its location, such as call centers or medical care providers.

Last year, we purchased a three-story, 46,071-square-foot office building, which we are completely gutting and re-skinning. Built in 1979 and situated along Dallas Parkway on a 1.9 acre tract, location was the deciding factor, as it will bring us closer to our clients and provide quicker commutes for many of our employees. Another determining factor in the purchase was that it is 80 percent leased and has a good tenant mix, despite its low parking ratio. The additional land gives us options for the future. Not every older building has the land or footprint to overcome these obstacles, and that may explain why many sit vacant.

From an investor point of view, Murl Richardson of Peloton Commercial Real Estate has been involved in the planning, acquisitions, finance, development, and marketing of commercial properties for decades. He believes that good locations always work and, for the most part, his firm’s stock in trade is repurposing buildings. But he cautions that there are too many people chasing too few properties and, as a consequence, the economics are out of whack. Sellers are asking too much to make these deals work.

According to Murl, four or five years ago, chasing an older building to retrofit was a great real estate play. It was easier to carry debt on existing buildings as there were always tenants in place versus a new buy. The risks were likely to be lower renovating a building than the uncertainty of leasing a new build. But today the market has tightened considerably, and seller expectations are too high.

Of course, strong banking relationships are essential to making these deals happen. Because we will be an owner-occupied building, once our renovations are complete, we have excellent financing in place, which also enables us to invest more in the retrofit which, we believe, will help to promote our company’s brand visibility.

In talking with Don Powell of BOKA Powell, any owner who plans to retrofit an existing building needs to consider a number of the large expenses upfront. A new roof is almost a given. Most older commercial buildings have little to no insulation and are energy hogs.

The mechanical systems are either outdated or worn out. Today’s building codes require a greater number of fresh air intakes than the older systems provide which means replacing air handlers. And if you are planning to convert from a single tenant to a multi-tenant facility, there is often not enough room for the additional mechanical improvements that are necessary due to the limited, reconfigured footprint.

Ceiling heights can present another structural challenge in modernizing older buildings. We plan to open up certain places in the building to expose the structure, such as boardrooms, lobbies and certain key areas to showcase them, but, outside these areas, we will leave the lower ceilings which are approximately 9 feet. By opening up the structure we can achieve 11 feet.

Sean O’Brien of O’Brien Architects believes that one of the biggest challenges from a design point of view is blending different periods and styles of architecture. It doesn’t work to force a building with a distinct style to be something it is not. He focuses on keeping office building designs clean, simple with lots of light while using timeless materials and featuring the building’s details.

For natural daylighting, older buildings often have fewer windows so creating a modern, visually impactful building means tearing off the exterior of the building and rebuilding it to achieve that natural daylighting effect. Of course, the costs to re-skin some buildings can be massive.

In fact, re-skinning an entire building is generally not cost-effective if you are seeking to add value to your investment. Instead, studying the site’s potential requires scrutinizing the exterior and interior condition, understanding the materials that can provide the best facelift to the façade and those improvements that will truly deliver greater value in the long-run, including wifi and fiber optics, along with upgraded energy and lighting systems.

Adding native landscaping, installing water features or outdoor art, and enhancing the exterior lighting can provide a strong, attractive statement. The same is true when you invest in the lobby areas, add a fitness room, a cafe, and clean, modern restrooms with new fixtures and finishes.

With existing tenants, there is the challenge of retrofitting while others are running their businesses. The timeline for our office retrofit is estimated at eight months while working around existing tenants, moving people to accommodate the construction, setting up temporary barricades, containing the AC system—the list is long.

So are retrofits worth the investment? With the experience of our own retrofit, I would look at “buy opportunities” for commercial retrofits several years down the road if the market starts to cool. Because it can be difficult to secure reasonable financing and ensure a strong return on your investment in North Texas now, I would wait for more opportune times.

Of course, moving 20 miles closer to Dallas from our existing location and renovating this building to suit our own needs has generated excitement companywide. We will have a great address on the tollway with our name on the building, which will bring greater visibility and presence—and that is a wonderful benefit too.

Charles R. Myers is CEO of MYCON General Contractors in McKinney and co-chairs the Industrial and Office Local Product Council for the North Texas District Council of the ULI.

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