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PRESCRIPTION for a HEALTHY RETROFIT MARKET.

High tech retrofit has become a booming commercial real estate market as office building owners and managers upgrade their properties to make them competitive in today's rapidly changing technology environment.

The size of the office retrofit market is open to speculation but industry sources interviewed for this article agree it is vast and point out that any building 15 years old or more is a candidate for retrofit. One source, Alexandria, VA-based Kastle Systems LLC, a systems integrator, defines the retrofit market as buildings larger than 75,000 square feet. On that basis, the company estimates there are around 14,000 buildings in the U.S. which are candidates for retrofit, representing around 2 billion square feet.

Whatever the size of the market, high tech retrofit is a complex process that managers should not try to do themselves, cautions Gene Samberg, president of Kastle Systems LLC.

He says managers who do their own retrofit soon find out that they are in deep water technologically and saddled with systems that eventually will not work because they are not in the business of providing the functions needed to operate and maintain high tech systems. The Kastle firm provides multiple integrated centrally managed commercial real estate services built on a single data base and accessible with a single card.

Paul Marucci, vice president of Chicago-based McShane Construction Corporation, sides with Samberg. "Hire competent contractors and don't try to do it yourself," he says. Menahem Deitcher, director of leasing for 175 West Jackson Boulevard, Chicago, a major retrofit project, adds, "You shouldn't do it yourself if you're not familiar with technology. Get people in the technology industry to advise you and take their advice."

What's Needed

Two of the main requirements for upgrading a building technologically are adequate power and high speed electronic communication systems. Thomas Jones, president of Dallas-based INFOMART, builders of technology communities, says tenant power requirements per square foot are doubling and in some cases reaching 100 watts per square foot. "Tenants with on-site critical operations often require multiple points of entry and/or emergency generators for redundant power to ensure reliability," he points out.

INFOMART is building the first national network of technology communities. The 1.6 million square foot INFOMART Dallas was the first and the company has announced plans to redevelop a site in downtown Los Angeles into an INFOMART technology community. A second Dallas site also has been acquired.

In Samberg's view, building owners need to outsource high tech retrofit and find a service that can provide all the different requirements on one unified database. "To my knowledge that's only available from one source, an outsourced service," he says.

Steven Peterson, vice president operations and engineering services for Houston-based Hines Interests LP, says high speed Internet connectivity and lots of band width are required for telecommunications retrofit. Multiple providers are needed to provide choices for tenants and most providers will install at no cost to building owners because they want access to the tenants, he says.

C.J. Butler, executive vice president management services for Presidio Investments, Dallas, owners, developers and operators of office buildings, says owners need to look at parking, electrical, cooling, elevator shaft space and floor layout. "You need to match the needs of the Internet user with the physical parameters they're going to operate under," he advises.

Michael Sullivan, principal of Oak Brook, IL-based Peak Construction, design/build and build-to-suit contractors, says the building communications spine should be upgraded. "Many single story and mid-rise office buildings don't have T-one or fiberoptic lines and the phone wiring won't support Internet activity," he comments.

Jerry Krusinski, vice president of Krusinski Construction Company, Oak Brook, design/build and build-to-suit contractors, says buildings must be able to accommodate a much higher percentage of electrical power consumption, a solid backbone of phone and data requirements including fiber optics and higher air conditioning capacity, all provided on an extended hour basis.

Marucci says redundant power sources are required, including two substations providing either UPS (uninterruptible power system) or a high quality generator system. He joins others in citing the necessity of fiber optics or other high efficiency telecom lines. Krusinski lists additional infrastructure needs as: adequate live loading on floors to accommodate the heavy density of people, equipment and operations; additional cooling capacity as required for process cooling; battery backup as well as standby natural gas or diesel generators for power; vertical and horizontal shaft provisions for cabling and process piping for cooling systems, duct work/exhaust and other systems.

Randy Lindenberg, design/build manager of Itasca, IL-based FCL Builders, Inc., lists four steps in making an office building technology ready: survey the existing facility and infrastructure; assess cost versus the value of retrofit; review electrical, HVAC, fire protection, plumbing and structural systems; and proceed with construction.

Accessing High Tech Corridors

New technology corridors are emerging consisting of clusters of companies grouped together in a common location. Sources point out that it is important for owners to understand this phenomenon and be able to take advantage of it. Jones says property owners need to know which tenants will attract others. It becomes important to know the nature of technology tenants' businesses and their interdependencies, he says, citing INFOMART's business model as an example.

"We first seek to anchor our properties with telecommunications carrier switches and collocation companies," says Jones. "This creates a nexus of diverse fiber paths to the property. The diversity and scale of telecommunications transport strengthens our leasing proposition to intensive telecommunications users who are generally technology companies. Property managers armed with knowledge of their tenants' businesses can offer more than

just 'real estate' solutions," he explains.

Another approach is described by Peterson. He says real estate companies which are owners and managers of high tech properties join together to discuss what technology will bring the most tenants to the table. "We cut the best deals we can with providers to obtain the highest levels of service and revenues," he says.

Samberg has a warning for owners and managers in connection with high technology corridor markets. "They should not get involved with boutique systems or services," he says, "but should go with the nationally recognized leaders whose systems and service fit their particular needs. Also to be avoided are vendors whose systems are in constant need of upgrading and replacement."

Sullivan says owners need to "Be aware of what's available from third party providers in respect to infrastructure. Technology operators are bringing state-of-the-art equipment to these corridors that owners may not know about."

Butler adds that managers need to know the viability of technology for building tenants. "First, you have to ask yourself if existing tenants need this technology," he said. Then you have to be able to match the products vendors can provide with those needs."

Costs of retrofitting vary widely because of the range and variety of properties and projects. Jones says in the case of carrier hotels or collocation facilities, retrofit costs can easily exceed the property's acquisition cost. A large portion of these costs is earmarked for power provisioning, security and other infrastructure-related improvements.

Krusinski says retrofit costs are subject to the base building condition and how many improvements are necessary to bring it up to a state-of-the-art facility. Sullivan points out that it depends on how much demolition is being done. Lindenberg agrees that costs can vary greatly depending on facility, location and existing infrastructure. Sullivan pegs the average retrofit cost at $50 to $60 per square foot, while Lindenberg's estimate is higher at $100 per square foot or more.

One of the nation's larger rerrofits has to be 175 West Jackson Boulevard in Chicago. It is among the city's 10 largest office buildings and is currently undergoing a $75 million Class. A renovation that will put 1.4 million square feet of office space and 45,000 square feet of retail space on the market. The project is 50 percent pre-leased, according to Deitcher. When it comes to retrofit costs, he says, "There's no formula. Every building is different."

Be Aware Of Pitfalls

Before starting any retrofit, though, owners and managers need to be aware of the pitfalls involved. Perhaps the foremost, mentioned earlier, is that a retrofit is definitely not a do it yourself project. Other sources cite cost implications. Lindenberg comments, "The amount of money required to provide adequate infrastructure and reserve power for these tenants is extraordinary. The difficulty for landlords is in financing high up-front costs for tenants who have little or no credit history."

Sullivan says the danger is in nor knowing the exact costs of retrofit or existing code violations that must be corrected which can put you over budget. On telecom retrofits, Jones says owners may underestimate costs because they can't determine them until they're midway into the project. And if the retrofit rakes longer than expected, they may lose a market window as the carrier signs with someone else.

Peterson notes, "You want to choose telecom providers who will stay and nor go out of business. Are they capitalized well enough to operate?"

Marucci also advises, "Don't get carried away and over-invest. Update those components that are functionally obsolete but it may not make sense to change the entire character of the building."

A related matter is how management companies can protect themselves in lease negotiations with startup dot coms, many of which are pre-IPO companies. "Management companies should probably get at least a year's worth of rent up front," advises Samberg. Krusinski agrees, saying that many landlords are requiring startup companies to securitize the cost of tenant improvement and the real estate commission with letters of credit and/or paying for the improvements up front.

"Find out what venture capital is supporting them and make sure you can get comfortable with that," advises Butler.

Sullivan says management firms should obtain personal guarantees from investors but observes that is hard to do because "You're in a gambling position. You may have to take the company as it exists or someone else will do the deal."

In respect to geographic location, both cities and suburbs are fertile grounds for retrofit, sources say. Jones says targets are generally the major metropolitan areas because they have a high concentration of commercial data lines. Samberg finds that most retrofits are raking place in the most highly competitive leasing areas such as Chicago, New York and Northern Virginia.

Speaking for the Chicago area, Sullivan sees the majority of retrofitting along major transportation arteries. "Chicago has always been a retrofit Mecca but we're seeing more in the suburbs than ever before," says Sullivan. "It's less expensive to retrofit than to build new."

Krusinski sees the preponderance of Chicago area retrofitting raking place in the city rather than its suburbs and Butler agrees that CBD's are the focus because they have more vacancies and easier access to cabling equipment.

Specialized Market

The rise of high tech retrofit has not created a new industry but it has generated a specialized market within the construction business, sources say. Lindenberg says, "There are companies that do nothing but this type of work. Some of our subcontractors are becoming preferred vendors for the tech market because they've been the only ones to complete some of these retrofits."

Krusinski adds, "When you know and understand the requirements and have good, sound construction experience, you can be very successful at this type of work."

Sullivan says that, "Fifteen years ago retrofit meant redoing the finishes, putting in new carpeting and installing light bulbs. Now it's a matter of specialized design and construction."

Looking ahead, high tech retrofitters face a number of challenges, one of the foremost being the availability of adequate power. Jones says, "Convincing utilities that telecom tenants need 85 to 100 watts per square foot and power feeds from redundant substations is a challenge."

Samberg observes that, "Given the magnitude of retrofitting, the real challenge is being able to properly satisfy the true needs of each property." Marucci sees the major challenge as incorporating increasingly strict building and safety code requirements while in Sullivan's view, finding ways to cost-effectively replace building components that have exceeded their life expectancy is the biggest challenge in performing a retrofit. However Butler concludes, "Each building definitely creates its own challenge."

John Bell is a freelance writer based in Chicago, IL who has written extensively on the real estate industry.
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Title Annotation:managing high tech retrofits for office buildings
Author:Bell, John
Publication:Journal of Property Management
Date:Nov 1, 2000
Words:2061
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