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‘Repurposing’ Vacant Offices Finds a New Audience

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There’s a new word in the construction industry, and it’s music to the ears of many companies in recession-impacted San Francisco Bay Area: Repurposing.

There’s a new word in the construction industry, and it’s music to the ears of many companies in recession-impacted San Francisco Bay Area: Repurposing.
Photo courtesy of Risk Management Solutions
There’s a new word in the construction industry, and it’s music to the ears of many companies in recession-impacted San Francisco Bay Area: Repurposing.
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BioMarin’s conversion of a warehouse into a manufacturing facility Novato is a typical example of the new trend to repurpose facilities instead of constructing from the ground, which can cost significantly more than even the most complex renovation.

Ralf Elsasser, biotech focus group leader with Dome Construction, says, “We basically dropped a three-story manufacturing facility into a warehouse. Using BIM computer strategies and a substantial amount of pre-planning with an integrated project team was the key to making everything fit.”

The close proximity to an existing facility, the reduced cost of utility connections and shorter schedule were primary drivers in this decision. Repurposing facilities for alternate uses is happening all over the Bay Area. Dome Construction also built AmyrisBiotechnologies’ renewable diesel-fuel science facility in what had been an office and storage space in an Emeryville building.

With the plethora of vacant buildings, the ratio of renovations to newly constructed facilities is increasing as demonstrated in figures provided by Gale Bate founder and CEO of Code Resources. Bate posted a statewide request for the data on the building officials’ website. Overall permits for 2009 were 58% of permits issued in 2008 on a dollar basis, whereas the number of permits issued overall in 2009 was 78% of the permits issued in 2008. New commercial building permits in 2009 were 33% of the permits issued for new commercial buildings in 2008 on a dollar basis, while the number of permits in 2009 was 50% of the 2008 number of permits.

Tenant improvement permits declined in 2009 as compared to 2008 as well, but not as significantly. The 2009 tenant improvement permits were 64% of the permits issued in 2008 on a dollar basis. The number of permits for tenant improvements of commercial buildings was 88% of the 2008 number of tenant improvement permits.

These numbers illustrate what everyone in the business is feeling -- there are fewer ground-up commercial projects while the tenant improvement market has been hit less significantly. These tenant improvement jobs have a shorter duration, resulting in a quicker turn time for replenishing backlog at companies associated with the construction industry. This, added with the more competitive market with more bidders on each job, accounts for why firms churn out a lot more estimates in 2008 with fewer big jobs awarded.

Lease rates are also more competitive in repurposed facilities. In the recession-hit Silicon Valley, for example, office vacancy rates at the end of the fourth quarter of 2009 had reached 19%, and space dedicated to research and development was just over 16%, according to Grubb & Ellis. A further inducement to lab location in the area was the drop in the asking rate for office space of an average asking rate of $2.53 per sq ft full service for office space and $1.04 per sq ft NNN for R&D locations, Grubb and Ellis also reported.

“The economics are great for forward-thinking companies to take advantage of 20% to 30% drop in rental rates over the last year combined with the significant competitive advantage available due to the unprecedented drop in construction costs to build out lab facilities,” says Nancy Morse of Grubb and Ellis.

This is a trend that will increase as the Bay Area incubates more and more biofuel, pharmaceutical, health care and computer technology companies that are stimulated by bold new federal and state initiatives and funding.

Another trend is converting single-tenant campuses to multi-tenant facilities. Many large corporations have fewer employees due to the economic downturn and their facility portfolio exceeds their needs.

The new Risk Management Solutions headquarters at the Pacific Research Center in Newark is a good example of repurposing of a facility. This BioMed Realty Trust property, a former Sun Microsystems campus, houses multiple companies through shared use and modifications of exiting and other building systems, including RMS’ headquarters.

Although there are multiple considerations to convert a single-occupant campus into use for multiple occupants, RMS senior facilities director Dave Alexander says his firm’s decision was the best solution to house its corporate headquarters and a data-center room.

“As you might imagine, there were a myriad decision points taken into consideration,” says Alexander. “Key for RMS in this decision was that the market was offering a smaller company (RMS) a fairly small window of opportunity in which to collaborate with a top-tier landlord and general contractor and develop a higher end project at attractive pricing. The combination of project team, price, location, infrastructure and amenities made for a very compelling package that could not have been matched with a stand alone, ground-up project. Keeping the location in close proximity to our existing offices also minimized employee disruption and impact on productivity.”

The facility now radiates the high-end look and feel via the designs of Resolution: 4 Architecture of New York.

Many property managers are trying to position their portfolios as sustainable to attract environmentally conscious tenants.

Jessica Black Smith, operations director for Portland-based Brightworks, a company that analyzes and provides sustainable solutions for the built environment, says, “I will say in general it is always a better idea to reuse an existing building unless it’s hopelessly inefficient. If you have the opportunity to completely redo HVAC and electrical and plumbing in an existing building then you will save a lot of the embodied energy involved in building something new and also benefit from the energy savings of the project.”

Artemis Health, an expanding prenatal diagnostics firm, was faced with the choice of building a new lab facility from scratch or repurposing an existing space in San Carlos Industrial Park.

Building a new facility would have required going through a extensive permitting procedure, a competitive vendor-selection process, obtaining funds from a constricted credit market and then months-long construction. Instead, Artemis did what many healthcare, biotech, biofuels, computer technology and other science-based firms are doing. It renovated one of the numerous vacant Northern California buildings into a facility that exactly suited its needs.

“The trend for life science-facilities is to utilize existing, built-out space that has generally been vacated as the result of mergers, acquisitions and shifting business operations,” says Sandra Jamme, Artemis’ facility manager. “Targeted existing buildings are typically fitted out with lab requirements, such as air handling systems, chemical fume hoods, cold rooms and deionized water systems. So repurposing is a cost-effective way, with minor tenant improvements, to swiftly begin operations.”

The downside to repurposing is that some of the solutions are not as optimal as if built specifically for the intended purpose. This may result in higher operation costs in some cases or in a shorter life between required upgrades.

But repurposing savings can be dramatic. Dome Construction, which has converted many former office spaces into labs, medical offices and tech facilities or alternative fuel-making operations, estimates that greenfield construction (building from the ground up) costs $650 per sq ft and conversions average only $225 per sq ft or less depending on extend of renovations. And the opportunities are abundant, since commercial real estate firms report that, in the wake of the Great Recession, there are millions of sq ft of office space in Northern California that are available for renovations.

The future of repurposing facilities from single tenant to multitenant facilities and converting office-to-lab conversations?

“I think we’re going to see fewer ground-up lab projects for Bay Area life-science companies in the future, as they continue to lease space from commercial realtors serving them,” says San Francisco-based Jeremy Agraz, Flad Architects’ director of project development.

Melody Spradlin is a design construction leader offering 23 years of experience, 13 focusing on Biotech/Hi-Tech Construction. She has led complex projects as an officer in the USN Civil Engineer Corp at Genentech. She also served as a consulting professor in the Design Construction Integration Masters program at Stanford University. Melody is a graduate of the U.S. Naval Academy, Stanford University and New Hampshire College.

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