Regardless of a property's age, the technology revolution often demands redevelopment.
Once they dotted the landscape as proud symbols of American industry. Rising amidst gray industrial districts, these sprawling structures - factories, printing plants and warehouses - churned out the products that built the old economy.
Then times changed. The industries that made products sold around the world began to lose their footing. Manufacturing plants closed as owners took their facilities abroad in search of cheaper labor. Soon many of the facilities that had once been a vital part of cities across the country grew dark and silent, their gates seemingly chained shut for the last time.
In recent years, a new economy, built on the technology of computers and the Internet, was born. A host of new companies, desperate to be the first to the market with telecommunication products, came looking for homes. Today, they are finding them in the most unlikely places.
Aging factories, office buildings, printing plants and department store buildings are being turned into modern, high-tech "telecom hotels." Instead of assembly lines, these buildings house telecommunications equipment such as servers, routers and switches that route data and voice through a fiber network that crisscrosses the country. They also are attracting a host of other enterprises that perform functions such as Web hosting, information storage and recovery. Dot.coms are setting up shop in these buildings to take advantage of the bandwidth they provide.
In high-tech cities such as Chicago, Boston, Atlanta, San Francisco and New York, demand for high-tech space is outstripping supply. At the same time, hosts of developers are moving quickly to bring millions of square footage to these markets.
In Chicago,say companies want nearly 2 million sq. ft. of space, and there is currently only about 600,000 sq. ft. on the market. However, that supply is likely to soar as another 4 million sq. ft. comes online in the next couple of years. New York's demand for this type of space soared from about 700,000 sq. ft. in 1997 to over 9 million sq. ft. at the close of 1999. To accommodate this demand, developers are busily searching for the proper building to meet high-tech needs.
"You look for existing stock that generally has a couple of conditions," explains Mike Jasso, senior vice president of Chicago-based Telecom Development Group. "You need to see buildings that can accommodate power needs with dual feeds from separate substations - power that's either in place or can be brought in," he says.
While the average office building uses 4 watts per square foot, the typical telecommunications facility may require as much as 100 watts per square foot, according to Jasso. Developers also look for proximity to fiber-optic lines and buildings that can support floor loads of 150 pounds per square foot, which is substantially more than the typical office building, he adds.
Jasso's company, which is part of a consortium of companies that develop high-tech facilities, recently purchased an old 200,000 sq. ft. True Value call center in Chicago, which should be ready in spring 2001.
The need for speed A major benefit of retrofitting a building is that it usually can be renovated and made ready for use in less time than new construction.
And speed can be an overwhelming consideration, says Mark Robbins, executive vice president at Chicago-based Transwestern Commercial Services, which is partnering with Telecom Development Group to bring high-tech properties to market.
"Nobody moves as fast as the tech firms," says Robbins. "For a tech firm, 30 days is like three years to a traditional corporate entity. In the traditional world of corporate relocation, they don't move at warp speed." He recalls one client who asked if 12,000 sq. ft. of space could be ready in eight days.
"Once a company receives its funding, it wants to be in the space tomorrow - literally," says Mike Brown, an agent in the San Francisco office of Los Angeles-based CB Richard Ellis. "That's always the challenge. Because spaces in these buildings can take anywhere from six months to a year to be ready, accommodating their interim growth presents a challenge."
Brown's firm represents clients seeking space in the Bay Area, particularly in the city's rapidly changing South of Market district. More so than perhaps any other city in the country, San Francisco is packed with too many high-tech companies chasing too little space. Vacancy rates are at about 1%, he says.
No more horse and buggy Sitting directly across the Queensboro Bridge from Manhattan in Long Island City, N.Y., a nondescript six-story brick building is one bright example of a high-tech retrofit. Long known as the Brewster Building, its history includes horse-drawn carriages, Rolls Royce autos and World War II fighter planes. In more recent times, it was a garment factory before the industry moved elsewhere.
A part of New York-based Brause Realty's portfolio, the Brewster Building has just undergone a multi-million dollar transformation into the BridgePlaza TechCentre.
According to vice president David Brause, the company is so confident that the building will be a success that it completed the renovation work before signing up a single tenant. In fact, the company poured between $20 million to $30 million of its own money - Brause won't say exactly how much - into restoring the facade, creating a new lobby, and installing new elevators, HVAC, windows, a roof and other improvements.
TechCentre has nearly all the advantages that clients look for in a building of this kind. Company officials are confident that those attributes, coupled with the right timing, will make it a success.
"Fiber was laid in the last few years over the Queensboro Bridge right in front of our building on Queens Plaza," explains Brause. He says the company decided to upgrade the building for tenants that would be able to take advantage of the fiber-optic lines. Those companies include Web-hosting, long-distance telephone switching, routing, data, emergency backup and other high-tech centers.
The building also is being marketed as an alternative to sky-high rents just a short subway ride across the river in Manhattan, where rents are $50 to $80 per square foot - if space can be found. TechCentre, thanks to its location as well as city and state tax incentives, will cost $22.50 to $23.50 a sq. ft. for space with 16 ft. ceilings.
"A lot of these Internet and high-tech companies have to prove a little quicker than they might have at the beginning of the year that they have positive earnings," notes Brause. "Now, if you're a venture capitalist, the last thing you want to see is all the money that you're putting into this company going into rent. It's not really a good investment in your company."
In fact, one company will be able to save $2 million a year on rent expenses by coming to Long Island City instead of Midtown Manhattan.
"That's a nice chunk of change," says Brause.
Department store telecoms Old factories are not the only buildings that provide ideal locations for telecom hotels. In the heart of Atlanta's business district, for example, the historic Macy's department store building is being converted to high-tech use by New York-based Taconic Investment Partners.
After years of declining sales, the store will now have a concentrated presence on the first floor, while telecommunication and co-location companies such as San Francisco-based Colo.com will take over the top five floors.
"Macy's decided it didn't need all the space that it occupied in downtown Atlanta," says Taconic's co-founder and principal Charles R. Bendit. "We saw it as an opportunity to convert a great, old building into something that is more consistent with the tenant demand for the next millennium."
Due to the lack of windows, it isn't attractive for office use, he says. "Telecom tenants don't really need a lot of windows. No other tenant really benefits from the heavy floor loading capacity or the high ceilings."
Taconic focuses on the development of buildings that cater to the needs of high-tech clients. Unlike many development companies, it also will provide many of the elements and buildouts that companies need to make space usable.
"We provide a base building installation, specifically catering to their needs," says Bendit. "In some instances, we will even build-out their space to a raised floor environment that includes all of the specific elements of their buildout, such as fire-suppression systems, security, air conditioning, raised floors and power distribution."
The company is developing more than 5 million sq. ft. of space in Washington, D.C., Manhattan and Chicago. Taconic was one of the first companies to enter the market in 1997 when it converted the circa-1931 Port Authority of New York building, according to Bendit.
"It already had some telecom tenants, and we were able to develop a niche in the marketplace," he says. "We have 56 different carriers in the building. It's probably one of the most important telecommunications centers in the United States, if not the world."
Taconic also is converting the 1.5 million sq. ft. E-Port in Chicago - the former Montgomery Ward & Co. Catalog Building located near the North Loop area - into a telecom hotel. MCI WorldCom, Broadwing and RCN Corp. already have leased more than 300,000 sq. ft.
New or old? While saving older buildings has received considerable press, the willingness of companies to move into older facilities often stems from a scarcity of new buildings to move into.
"The tenants who are willing to accept a rehabbed warehouse building as a data center or telecom building that is heavily improved will do so because they can't wait for a build-to-suit, or there's no existing building that anybody's constructed in the area," says Steve Layton, principal of Newport Beach, Calif.-based Layton-Belling & Associates (LBA).
LBA has been careful in the selection of properties to add to its portfolio, preferring to take a conservative approach. "We're looking at a piece of property and asking if this is a good piece of real estate in a good location, and whether it's near fiber lines," says Layton. "Is it in a Class-A location, but an underutilized piece of real estate? If it's an underutilized building with someone moving out or it's empty, you're probably going to be able to buy it at a fairly good price."
LBA also has engaged in its share of building conversions. The company renovated a nine-story, 154,530 sq. ft. office tower at 19000 MacArthur in Irvine, Calif., for use by high-tech clients. In a prime location across the street from Orange County's John Wayne Airport, the company completed more than $3 million in renovations that included adding fiber-optic communications networking throughout the building.
Within months, the building was completely leased to companies ranging from American Express and Salomon Smith Barney to Qwest Communications, Colo.com, and DSL service-provider Winfire. The area has attracted a large number of companies that seek access to the many fiber loops that telecommunications companies have installed in the area.
Another project was 201 Douglas in El Segundo, Calif. This four-story, 320,000 sq. ft. building was an engineering facility for Rockwell's B-1 bomber program. After retrofitting the property, LBA sold it to a human resources software firm.
"We rehab buildings because it's a lot more cost-effective when you buy it at the right price, as opposed to going out and buying a piece of land and then building up from there," says Layton.
"In some of the markets in Southern, there just isn't a lot of land available," he says. "So, even if you wanted to build from the ground up, the land is going to be very expensive. It may prohibit you from building an industrial-type building."
Employee satisfaction While there are many sound economic reasons for retrofitting an older building, one that seldom is cited by developers, but often is in the minds of company officials, is employee satisfaction. Many New Economy companies are more than willing to fight for this kind of space because of what location can mean to them.
"The market for employees is so tough out there that they've got to be competitive, and the office space is a very important factor," says CB Richard Ellis' Brown, who represents companies such as M Power, E-Group and Xuma Technology.
"They're interested in something that's non-traditional," he adds. "Most of these companies are trying to hire young, innovative people who don't necessarily want to work in a traditional office building."
The ability to expand is vital for companies. High-tech tenants often will seek larger facilities into which they can grow as their business develops.
"It also helps in the event that the company has to downsize," says Brown. "The company may be in a building where there are numerous tenants that can absorb that space."
The movement toward retrofitting aging buildings for high-tech uses is also about flexibility. When a facility can no longer serve its original purpose, a new one can extend its life. These developments are giving life to structures whose days had seemed long gone.
Companies also want to congregate with their high-tech brethren so they can develop partnerships. "It's important for them to be in the area where a critical mass has been developed," says Brown. "As they develop as a company, they need to create partnerships and work with these other firms."
INFOMART, the Dallas-based developer of technology communities, wants to become the brand name for high-tech facilities.
The company has a 1.6 million sq. ft. facility already online in Dallas housing more than 120 technology companies, including 26 telecommunications providers such as Allegiance Telecom, Teligent, MCI Worldcom and others. The company now is working to expand its reach across the country.
A 300,000 sq. ft. structure is under development in Dallas. And on opposite coasts, renovations are under way on a 400,000 sq. ft. cold storage facility in Watertown, Mass., a suburb of Boston, and on the 500,000 sq. ft. Post Office Terminal Annex in Los Angeles. In the next few years, INFOMART hopes to add 10 to 12 more high-tech developments to form a national network of technology communities. Tom Jones, INFOMART's president and general manager, views the company's model as a sort of ecosystem made up of layers of telecom carriers and co-location companies.
INFOMART opened its doors in 1985 as a market center for information technology. At that time, its tenant list included Xerox, IBM and AT&T.
"As the market changed and the industry migrated from a computer-centric industry to a telecommunications-centric industry, we saw a new opportunity open up to us to co-locate telecom carriers in our facility," says Jones. "We wanted to provide a nexus of diverse fiber pathways into the property, which would be an outstanding environment to locate companies in the e-commerce market. We have like-minded citizens here as tenants."
Jones believes these companies find strategic and economic synergy by virtue of their proximity to each other.
INFOMART is building its network in consultation with its national tenants about their space needs. "Then, once we superimpose those requirements on top of each other, it gives us some sense of the demand in one city vs. another," says Jones. "We also go to that city and study the existing fiber maps and try to locate properties that would be suitable for retrofit that are close to that fiber."
Once a short list of properties is identified, the company examines which ones best meet the requirements for telecom operations, including fiber-optic lines, power generation and large floor capacities.
Jones says the market for these facilities is deep, so he and other company officials don't lie awake at night worrying about whether they are trying to fill a need that isn't there. "No, we lay awake at night trying to service the existing demand that we see in the market."