Commercial real estate (CRE) is a competitive industry. Landlords compete to attract tenants and investors compete to get the properties with the best potential returns. And, in this never-ending race, owners invest in renovating properties to add curb appeal and state-of-the-art amenities to older buildings.
Using data provided by CommercialEdge, we set out to analyze how office property renovations progressed since the turn of the millennium, as well as the markets where they were most prevalent.
For this study, we only analyzed office buildings larger than 25,000 total square feet, and also made the distinction between complete renovations — which include upgrades to structural or mechanical systems in a property — and cosmetic renovations, which consist of purely visual upgrades applied to façades, lobbies or common areas. We also split markets into medium-sized — with a total office inventory between 50 million and 100 million square feet — and large markets with an inventory larger than 100 million square feet. We then ranked them based on the percentage of properties out of the total that were renovated between 2000 and 2019.
Read on to see how the renovation industry has fared since the turn of the millennium, as well as which markets had the largest percentage of properties renovated.
Office Building Renovations Slow Nationally Since Mid-2010s Highs
The CRE sector was hit hard by the financial crisis of 2008. This is illustrated in the number of complete and cosmetic renovation projects, which dropped year-over-year between 2008 and 2009 as far fewer projects were begun.
However, by 2012, the number of properties being renovated had recovered, and bullish sentiment in the office industry meant that renovating properties to raise their value was an increasingly popular investment. Then, in 2014, an all-time high of 366 complete renovation projects were completed. A few years later, in 2016, the high-water mark for cosmetic works peaked with 1,699 renovations.
But, after these spikes, the number of renovations began dropping year-over-year.
There could be a multitude of possible causes for this gradual decrease. For example, there could simply be fewer properties that need renovation after the boom during the first half of the 2010s. Likewise, a previous CommercialCafe study showed that, in the timeframe when office building renovations were dropping, deliveries for new buildings were steadily increasing — especially in urban areas. This could mean that tenants were looking to lease office space delivered through zoning and urban renewal, rather than in older buildings in high-density areas. At the same time, cash availability in the industry was decreasing, with Chinese investors becoming net sellers in 2018 for the first time since the financial meltdown. While it’s difficult to pinpoint a single event as a direct cause, any of these in combination with a multitude of other macroeconomic trends could influence investor appetite in renovating properties.
Complete Renovations: Northeast Home to 4 of Top 5 Large Markets by Fully Renovated Office Properties
As one of the most competitive CRE markets globally, Manhattan leads the list of large markets with the largest percentage of properties receiving complete renovations. In total, 16% of Manhattan’s office properties — adding up to more than 100 million square feet of office space in Manhattan — were fully renovated between 2000 and 2019. On average, these renovated properties are 87 years old, while the average age for all office buildings in the borough is 81.
The Empire State Building is one of the most iconic buildings that was renovated in the last two decades, being the subject of a $500-million project that was completed in 2011.
The prevalence of East Coast cities in the upper part of the list (four of the top five markets are in the Northeast) could be due to the fact that a larger portion of their office inventory is made up of older properties built in the skyscraper booms of the 1930s and 1980s. To that end, three more large markets in the Northeast made the top five: Boston at #2, New Jersey at #4 and Philadelphia at #5. These markets saw 11%, 9% and 8%, respectively of all their properties fully renovated in the last two decades. Meanwhile, budding tech centers such as Phoenix, Denver and San Diego have fewer old properties to renovate, resulting in a lower percentage of renovations out of the total.
San Francisco was the only outlier in the top five, reaching #3 with 9% of its properties being fully renovated since the year 2000. The average renovated office space in San Francisco was 69 years old. Besides San Francisco and San Diego, two other West Coast markets also made the top 10 — The Bay Area at #9 and Seattle at #10.
When looking at medium-sized markets, Bridgeport, Conn., ranked first for complete renovations with 9% of its properties having been redone.
The next three markets — Long Island, Miami and Pittsburgh — all had around 7% of their office buildings receive full renovations. The top five was rounded out by St. Louis, where 6% of the market’s total inventory (42 properties) were renovated in the last two decades.
Cosmetic Renovations: 42% of all Manhattan Properties Underwent Visual Makeovers in Last 20 Years
Manhattan and Boston also headlined the list for cosmetic renovations. In Manhattan, nearly 42% of all properties got a facelift between 2000 and 2019. The market is also home to the second-largest property to be renovated since the year 2000 — the 3.6-million-square-foot 55 Water St. Built on a superblock containing four adjacent city blocks, the building received its most recent cosmetic upgrade in 2017.
Boston followed behind Manhattan with just over 29% of all properties being visually upgraded, inching ahead of New Jersey. And, across the country in San Diego, 26% of properties were visually renovated in the last two decades. The properties that were visually renovated in San Diego were only 33 years old on average, as opposed to 50 years old in Boston and 87 years in Manhattan.
The only non-coastal office market to make the top five was Denver. Notably, office space for lease in Denver is in demand thanks to the metro’s status as a growing tech center, which likely pushes investments in office property renovations, as well.
Bridgeport, Conn., also led the list of medium-sized markets when it came to cosmetic renovations. Between 2000 and 2019, 37% of its inventory received a visual upgrade, surpassing Long Island’s 34% and Indianapolis’ 33%.
In San Antonio, 19% of all office properties received cosmetic renovations. However, this market is notable for hosting the largest property by total square footage to be renovated since 2000. Specifically — the 5.1-million-square-foot corporate headquarters of the USAA received visual upgrades in 2019 as well as a complete renovation that was finalized in 2014.
Property data was provided by CommercialEdge.
For the purposes of this study, we only included properties larger than 25,000 square feet for which a cosmetic or complete renovation was completed between January 1, 2000, and December 31, 2019. Cosmetic renovations are defined as projects to visually upgrade the façade or lobby of a property. Complete renovations consist of upgrades to a property’s HVAC, elevators, building structure or other investments that directly benefit tenants.
A single property could count toward a market’s complete renovations and cosmetic renovations, as long as both projects were completed within the specified timeframe. Properties were only counted once in each statistic even if they received several separate renovations of the same type between 2000 and 2019.
For a clearer comparison, markets were divided into two pools: medium-sized markets with an office inventory between 50 million and 100 million square feet, and large markets with an office inventory larger than 100 million square feet.