Renovate or Die

By Jeffrey Spivak

Planners in Montgomery County, Maryland, could see the trends converging, and they decided to take preemptive action.

The planning department for the suburban county outside Washington, D.C., commissioned a study in 2015 about the struggling office market. The results were sobering: The county's job market was improving, but office vacancy rates were climbing, while asking rents had sunk. Hit particularly hard were office parks like the five-million-square-foot Rock Spring, whose vacancy rate had ballooned over time from 11 percent in the mid-1990s to 24 percent two decades later.

Then, last year, the county was hit with a bombshell: Marriott International announced plans to move its headquarters out of Rock Spring. That eventual departure of 3,500 employees could elevate the office park's vacancy rate past 30 percent, further squeezing the county's tax revenues.

The planning department swung into action. This year, they produced a new master plan covering Rock Spring. It recommends rezoning the area to commercial-residential and neighborhood retail to allow for a new flexible mix of uses.

"For Rock Spring to succeed, it needs to stop feeling like a gated community," says Gwen Wright, the county's planning director. "It needs to become seamlessly part of the wider community."

Across the U.S., traditional suburban office parks are increasingly considered obsolete in today's shifting office market.

Tenant preferences are swinging toward mixed use, walkable, live-work-play environments, as companies find it's tougher to recruit the emerging millennial workforce to sterile, single-use buildings. Some large-scale office parks are trying to revamp and expand. They're adding restaurants, cafes, shops, hotels, parkland, even apartments — amenities that keep people there past 5 p.m.

The repurposing of 1980s-era suburban office parks is a burgeoning 2010s-era real estate phenomenon. And it needs some help from planners.

Office park transformations often require new conceptual designs, zoning changes, and community approval. This can present challenges in suburbia. On the one hand, office parks have been a leading source of employment and tax revenues in their communities, so city officials often have a vested interest in trying to preserve the status quo. On the other hand, revitalizing an office park involves allowing new uses at their locations, which usually provokes neighborhood opposition. And that's where planners come in.

"There's a new, better model for office parks now," says Carlos Rodrigues, FAICP, a New Jersey-based planning consultant who has studied the problem in his state and codirected a tour of a suburban office park repurposing project during APA's National Planning Conference last May. "Planners can play a leadership role in this."

'The new American ghost town'

The suburban office park model dates back just 60 years or so, to a development that opened in 1955 in Mountain Brook, Alabama, outside Birmingham. By the 1980s, office parks had joined farms and factories as icons of American labor. Today, though, the classic suburban office park is seldom built. It's a dying breed.

Just look at the headlines. From the Washington Post: "The old suburban office park is the new American ghost town." From Pacific Standard magazine: "The death of the suburban office park ..." Then there are the corporations that have made high-profile announcements about abandoning suburban campuses: McDonald's and Motorola from outside Chicago, General Electric in Connecticut, Transamerica from outside Denver, and on and on.

"Obsolete office parks are like the manufacturing facilities of the 1960s and 1970s. They're doomed," declares James Hughes, current professor and former dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, who was recently honored by APA's New Jersey chapter with a NJ Future Smart Growth leadership award.

In a seminal study simply titled "Suburban Office Obsolescence," real estate services firm Newmark Grubb Knight Frank (now Newmark Knight Frank) determined in 2015 that between 14 and 22 percent of suburban office space in the 50 largest U.S. metros was in some stage of obsolescence—in other words, declining in value and returns. Similarly, a study of the New Jersey office market by PlanSmart NJ, a nonprofit planning advocacy group, estimated that one of every five office parks in the state was "stranded" or struggling with consistently high vacancy rates and falling property valuations.

As PlanSmart NJ puts it, "The 20th century suburban office park is not meeting the demands of the 21st century workforce, leaving the sites deserted as businesses relocate to mixed use areas that provide the amenities their employees want."

The Newmark study identifies common characteristics of obsolescence, including 20-plus-yearold buildings, car-centric locations without transit availability, and floor plates with low ceilings and too many walls. It also quantifies the financial benefits of suburban properties offering modern features like recent renovations, transit access, dining options, and open floor plates. In one Denver suburban county, rent for those kinds of properties was 43 percent higher than those with obsolescent characteristics. The rent premium found in the Washington, D.C., suburbs of Reston and Herndon, Virginia, was even higher, at 54 percent.

"The market has prescribed a 'renovate or die' approach for owners of obsolete properties," the Newmark study concludes.

Plenty of those property owners are choosing the former.

Resurrecting a dying breed

For years, the New England Executive Park was a jewel of Boston's office market in suburban Burlington. Built beginning in 1969, it attracted tech firms in a town whose motto became "Where technology goes to work," and the office park grew to encompass more than 10 buildings and one million square feet of space. Early this decade, its owner sold the complex for double the price it originally paid in the 1990s.

Soon enough, however, the new ownership group came to believe the office park needed a makeover. It was a sterile, one-use environment, and the vacancy rate was rising above 20 percent. Commercial real estate firm National Development, part of the new ownership, heard from tech company tenants that were having trouble recruiting new employees there.

"The actual product was outdated," says Andrew Gallinaro, National Development's senior vice president and director of asset management.

So the company set about transforming the office park. It is now completing a $300 million package of improvements that included demolishing 100,000 square feet and adding a hotel and five restaurants along a new main street, plus pocket parks, a walking trail, fitness facilities, retail services like a hair salon, and remodeled office buildings — including one with a roof deck. National Development even rebranded the property as simply "The District."

"We're creating a new sense of place," Gallinaro says. "It's an urban experience in the suburbs." And it's working, as The District's new space is getting fully leased, the vacancy rate is falling, and rents are increasing.

A decade ago, there were hardly any suburban office parks that had undergone transformations, according to Ellen Dunham-Jones, professor and director of the urban design program at Georgia Tech who has followed this trend as author of the 2009 book Retrofitting Suburbia: Urban Design Solutions for Redesigning Suburbs. Now her own database of U.S. office park retrofits completed or ongoing numbers more than 100. The highest concentrations are on the East Coast, where office parks came of age in New Jersey and Connecticut, along with Texas and California, which have larger, commercial-oriented suburban edge cities.

The most celebrated example is Tysons Corner, home to some 120,000 office workers in suburban Washington, D.C. It's undergoing, in the words of Washingtonian magazine, "the most ambitious re-urbanization project on Earth," with apartment towers, arts venues, a restaurant-and-nightclub scene, and 160 acres of parks and open spaces.

Another ambitious reurbanization project broke ground this past summer. Bishop Ranch, a 30-yearold suburban San Francisco office park with 26 buildings housing Fortune 500 tenants like Chevron, IBM, and AT&T, is building its own downtown-like City Center.

The project, whose first phase is slated to open in 2018, is designed by world-renowned architect Renzo Piano and will include a street grid layout of low-rise buildings with all-glass facades surrounding a central piazza. Some 300,000 square feet will house upwards of 70 retailers and restaurants, even a premium movie theater.

"In the suburbs, what's missing is a downtown core, and you have to build those to serve the market," says Jeff Dodd, senior vice president of Sunset Development Co., which owns and operates Bishop Ranch. "We want this to be our heart and soul to complement the existing business environment."

Appealing to millennials

The changes being made at office parks are not just to modernize. They're changes to adapt to today's office environment — and workers. Corporations and office developers face competition from tech firms that provide employees amenities like coffee shops, locker rooms and basketball courts, dry cleaners, hair stylists, and even health care facilities.

These new-style office amenities particularly appeal to millennials. They now account for more than one-third of the U.S. workforce, and their interests and desires are driving office-space trends. As Andrea Cross, Americas head of office research for commercial real estate services firm CBRE, puts it: "People have more choice about where to work than ever before, and if you have an environment that's not appealing, they're going to choose to go somewhere else."

One appealing environment that millennials — and a growing number of office park tenants — commonly want: walkability.

Numerous studies in recent years have highlighted the shifting preference in the U.S. office market toward vibrant, compact, walkable properties. Christopher Leinberger, professor and chair of the Center for Real Estate and Urban Analysis at George Washington University in Washington, D.C., has studied this issue extensively. His report last year, called "Foot Traffic Ahead," in partnership with sustainable planning advocacy group Smart Growth America, examined rents per square foot in urban or suburban walkable districts compared to drivable, suburban-only developments. The results: The walkable rent premium was 30 percent higher in more than 75 percent of the large metropolitan areas analyzed.

"There's this tremendous price premium," says Leinberger. "It's the exact opposite of the dynamics in the 1980s. There's been a huge sea change."

Back in Massachusetts at The District office complex, Blue Duck Software, a security software firm, faced an expansion decision. The firm made the office park its headquarters in 2012, but by 2016 the company needed much more space. It considered moving to downtown Boston, but eventually chose to occupy more floors in The District. Part of the reason: ll the improvements The District is making to add restaurants, trails, multiple fitness facilities, even a bike share program. Blue Duck employees — many of them millennials in their 20s — can be seen walking or biking to these amenities.

"The improvements have been massive in terms of the look and feel of the environment," says Stephen Gregorio, Black Duck's chief financial officer. "Without question, it's a much better place."

Working with the community

While these renovations are beneficial, they can be difficult to get off the ground. Office park transformations are often complex projects that require significant buy-in from local communities. New plans must win acceptance. New uses necessitate zoning changes. Sometimes this process is lengthy and can make developers weary, even wary.

One of the most high-profile attempts at an office park transformation turned into a saga of frustration for the developer. Bell Labs in suburban New Jersey was a monument to a bygone era. The one-time home of Bell Telephone researchers, it produced some breakthrough technological achievements, such as the development of the laser. But it was also a 1960s-era office center with two million square feet surrounded by an ocean of 4,000 parking spaces. By the late 2000s, the mammoth structure was abandoned.

Enter locally based Somerset Development. It had an idea to create an entirely new center on the site — a mixed use town center inside the main building, complete with a hotel, conference center, and municipal library, while residential development would ring the complex. But Holmdel Township government leaders and residents balked at the concept. They didn't want housing; they wanted the office center to stay as it was and find a new tenant. But the complex was so big, there weren't big enough companies to consider it. It took Somerset close to a decade to reach a compromise with the community to allow single-family homes and town houses.

"We thought if we came in with a great plan, it would be embraced," says Ralph Zucker, Somerset's president. "But you can't just foist a plan on a community. You need to involve the community in formulating the plan. You need to build trust." One way they did this was by holding an open house with projectors displaying a mock town center with possible storefronts to show the community alternative uses.

Zucker thinks this is where planners should come in. He believes they need to be candid with hesitant municipalities about the realities of finding new tenants for their office parks. "My advice for planners is to be brutally honest," he says, "and help developers establish that trust with the community and politicians."

Planners to the rescue

For planners, then, the takeaway is how to make the repurposing process go smoother — and not take so long.

Planners can help communities embrace the new reality of office markets by working with office park owners or developers on updated master plans and being proactive toward preparing their communities for needed changes.

"It's often a tough situation for suburban communities. They ask, 'What do we do?' and 'What can we do?' and there's not an easy answer," says Brian O'Leary, AICP, executive director of the Chester County Planning Commission outside Philadelphia. "There's an opportunity for planners to advocate for more mixed uses and walkability, and they need to be flexible about what needs to happen for these places to stay competitive and vibrant."

During the last few years, O'Leary has helped two suburban counties identify proactive steps for municipalities with suburban office parks that are losing tenants — and thus losing employment and tax revenues for those communities. His most recent venture, a 2017 analysis of office parks in Chester County, about 40 miles from downtown Philadelphia, produced a "vision for revitalization". Its strategies include, among other things:

ADDING more diverse uses, such as first-floor retail, high-density residential, and multimodal transportation

ALLOWING zoning flexibility on issues ranging from building setbacks to parking requirements

PROVIDING Incentives for properties that add community amenities such as park or concert spaces

CREATING some sort of business improvement district that can levy an additional tax to help fund some of the infrastructure upgrades, such as streets-cape enhancements

ESTABLISHING an expedited regulatory and permitting process for office park redevelopments once a new vision for the property has been approved

So far, the guide is proving useful. "Municipalities are showing a willingness to take some of these steps," O'Leary says.

Gwen Wright's Montgomery County Planning Department went one step further when producing its new master plan this year for the Rock Spring office park, which still has significant tenants like Lockheed Martin. The draft plan, along with its recommendations for rezoning and adding new mixed uses, also devises a new design concept. It proposes a central, pedestrian-oriented "main street" through the property that would serve as a "spine" where new development would be concentrated, creating a new "sense of place."

The planning department took on this role because Rock Spring is not a single-owner property, but involves multiple building owners and no single property manager.

"No one's thinking about the big picture there," Wright says, "so we are."

Now, one developer at Rock Spring is already moving ahead with improvements, such as adding multifamily housing. At press time, the planning department's full concept and the recommendations were slated to go before the full county council this fall.

In the end, office market experts believe such planning approaches will help determine some of the winners and losers in the new office market environment.

"There's still life in suburban office markets, but communities and owners of office assets with challenges have to be prepared to make changes," says Alexander "Sandy" Paul, managing director of national market research for Newmark Knight Frank. "Suburban markets that address this trend will be doing better."

Jeffrey Spivak, a market research director in suburban Kansas City, Missouri, is an award-winning writer specializing in real estate planning, development, and demographic trends.

Resources

Montgomery County, Maryland, Planning Department's Rock Spring Master Plan: tinyurl.com/yd6zsg8m

Chester County, Pennsylvania, planning report, "Reinventing Office Parks for the 21st Century": tinyurl.com/y7o3c9k4

PlanSmart NJ's report, "A Guide to the Future: Repurposing Stranded Assets and Revitanlizing New Jersey's Suburbs": plansmartnj.org/publications

Rethinking the Corporate Campus: The 2017 SPUR (San Francisco Bay Area Planning and Urban Research Association) report recommends changes in locations, commutes, and form for area businesses. tinyurl.com/yarywqrk