While significant challenges from COVID-19 continue to be felt in city centers around the world, the quote from Mark Twain seems applicable to cities in this moment: “The reports of my death are greatly exaggerated.” As single-use office towers, hotels and retail spaces in city centers around the world remain severely underutilized, increased attention is being placed on how these structures can be re-purposed to thrive in the post-COVID-19 world. Adding complimentary components to single-use buildings can create more operationally intensive, dynamic environments resulting in a more optimal utilization of space and improved financial returns. This is particularly apparent in a post-COVID-19 environment where engagement with the built environment will look and feel different than it did in a pre-COVID-19 context. This re-purposing will be one of several key drivers that help cities return to concentrated hives of productivity, collaboration, innovation, and culture. Single purpose office towers and single purpose hotels offer two good examples of how this trend will take shape:
- As certain sectors of the economy may not return to the office on an “all day, every day” basis, single-use office towers could face structural reductions in use/occupancy levels when compared to pre-COVID-19 use/occupancy levels. This shift in utilization levels presents an opportunity to creatively re-purpose these single-use towers. For example, office towers could be re-purposed to incorporate housing units, add temporary meeting/event spaces for use on a “one off”/episodic basis by tenants and non-tenants alike, add new food and beverage offerings, and/or provide new wellness or general entertainment spaces. Adding these alternative uses has the potential to help (1) retain core, anchor tenants who might otherwise consider re-locating to more “amenity rich” office buildings and (2) make the “office experience” more compelling and thereby pull more people back to the office.
- As city center hotel occupancy levels remain at historic lows, with continued uncertainty as to when demand levels will return, hotel owners may benefit from adapting a single-use hotel for additional, alternative uses in order to more fully optimize the financial and operational performance of the building. This is particularly true for city center hotels that historically relied on international business travelers, both on an individual and group basis. Single-use hotels could be adapted to include co-working spaces, wellness spaces, general entertainment spaces, innovative food and beverage concepts, and delivery-only kitchens to support the bourgeoning food-delivery sector. In addition, various types of residential products — serviced apartments, co-living, residential rental units or full-ownership apartments/flats — could be introduced. In the face of limited demand, many city center hotels have already adapted hotel guest rooms into temporary office spaces which can be used on a daily-basis by individuals as a periodic alternative to working from home.
Multi-component, operationally intensive buildings are more complicated to operate and manage than a single-use commercial office building with a stabilized rent roll or a single-use hotel that historically enjoyed high-occupancy and high nightly rates. COVID-19, however, is challenging this narrow, static operating model. Flexible, multi-component buildings are more resilient to external demand shocks such as COVID-19 and, if executed well, can prove more financially accretive to investors.
Several factors should be evaluated when considering whether to embark on the journey from a single-use operating model to a multi-use operating model within a single structure:
Achieving Early Alignment with Key Third-Party Stakeholders
Existing Lenders, Tenants, Investors, Operators and Franchisors
Any consideration about adapting a building from a single-use model to a multi-use model will, of course, require early and ongoing cooperation from existing lenders, tenants, equity investors, operators and franchisors. Achieving early alignment with these stakeholders on the vision and strategy will demand a thoughtful business plan. The plan should set out how the re-purposing will be executed and the resulting “uplift” in financial performance from the enhanced operating environment following completion of the repurposing works.
Planning and Zoning
An assessment of whether the planning/zoning authorities will support the re-purposing of the space should be made early on, as delays caused by planning objections or other public resistance could increase overall investment costs. In addition, flexible planning should be sought to allow spaces to be further adapted in the future to address evolving or temporary changes in demand patterns of existing or potential end-users.
Capital Expenditure Planning
An evaluation of the building’s existing infrastructure (mechanical, electrical, plumbing, and technological systems) should be made to determine if upgrades or replacements of infrastructure will be necessary to support the new uses. The infrastructure demands of a multi-component building differ meaningfully from a single-use building and, therefore, the level of infrastructure investment to support the new uses is a critical piece of the financial underwriting. Also, items such as access points, elevator/lift service, and other shared areas needs to be evaluated from a design and operational perspective to ensure the essence of each dedicated use can be preserved while still affording the operational and financial efficiencies introduced by the presence of multiple user groups within a single structure.
The determination of the optimal mix of uses will be informed by a variety of factors, including the location of the building, the services/amenities available within the immediate vicinity of the building, and the expected users of the adapted space. This step will include an assessment of anticipated weekday versus weekend use, daytime versus nighttime use, and the qualitative and experiential expectations of the anticipated user groups. These considerations will inform the viability of each contemplated use and the anticipated financial performance of the re-purposed building.
Legal Structuring and Operating Model Considerations
The stakeholders will need to consider how to create, as much as possible, a nimble and flexible ownership/use structure to allow the various spaces to be flexed and adapted in the future as use and demand patterns shift and evolve over time. If, for example, a residential use is introduced into a commercial office tower, then condominium/common-ownership-type structures or long-term leaseholds (depending on the legal regime in the applicable location around the world) may be required. This has downstream impacts on the ease of further adapting those spaces in the future given the relatively “fixed” nature of these structures once implemented. On the other hand, and for example, adapting event/ballroom space in a hotel to co-working, wellness or general entertainment space could likely be achieved using a more short-term, flexible licensing arrangement. This approach would allow the stakeholders to return the space to its original use or further adapt the space as demand patterns evolve over time.
Beyond the legal structures, a determination of how the building will be operated/managed should be assessed. For example, many third-party office managers are not equipped to also manage residential, hotel, and/or food and beverage spaces nor are all hotel managers equipped to manage residential, office, and/or food and beverage spaces. That said, many hotel operators, particularly larger operators in the full-service and luxury segments of the hotel industry, are well equipped to effectively manage residential projects, and food and beverage spaces. Looking ahead, it would not be terribly surprising for these hotel operators to extend their service offering into managing office spaces within a building that also houses a hotel. It could be that a single operator is engaged to manage/operate all components of the building. This “one-stop-shop” management arrangement would naturally introduce further operational and cost efficiencies as well as provide a consistent service delivery level across the various components.
Re-purposing existing single-use buildings into multi-use, operationally intensive, and dynamic environments to address shifting demand patterns in a post-COVID-19 world will be a gradual evolution. This evolution is not a new phenomenon as the value proposition of mixed-use structures in city centers was validated long before the arrival of COVID-19. Rather, COVID-19 will accelerate this trend as flexible multi-component structures can drive higher financial returns and provide a more resilient operating model than their single-use counterparts. This creative re-purposing will play an important role in helping return city centers to thriving and dynamic eco-systems of productivity, collaboration, innovation, and culture.
Matthew PohlmanPartnerCo-Chair, Hospitality & Leisure