Moody’s: Older Office Buildings Require Capital Improvements As Usage Patterns Shift

Central business district office buildings are aging, and retrofitting older buildings to address workforce changes and space-usage patterns will require capital improvements, reported Moody’s Investors Services, New York.

Moody’s said most CBD office stock dates to 1990 or earlier.

“Office-using employment is increasingly driven by a younger workforce with different work styles than previous generations,” Moody’s Sector In-Depth report said, noting that Millennials born between 1982 and 2000 represent more than a quarter of the nation’s population–larger than Baby Boomers–and they should make up more than 40 percent of the workforce by 2020. “The challenge for office landlords and tenants is to provide environments that attract and retain a workforce that is undergoing a generational shift.”

Cushman & Wakefield, New York, reported that more than 60 percent of office occupiers are implementing workplace changes or plan to do so. While about one-quarter of occupiers indicated that cost factors drove those changes, 37 percent cited “organizational goals” such as increasing communication and collaboration among employees, employee creativity and customer responsiveness as the principal driver.

Office tenants planning workplace initiatives often cited changes that reduce office space per worker, provide flexible layouts and increase meeting rooms and social space, Moody’s reported. “While there has been a shift away from private offices to shared workspaces, there has also been an increase in the amount of time spent in meetings, increasing the need for conference space,” the report said.

Indeed, office space per employee has decreased in recent years. But much of that decline occurred in Class B and Class C buildings, which often house back-office operations. Moody’s noted that while densification occurs most often in low profit margin businesses such as engineering and insurance in which rent comprises a large part of the cost structure.

“For companies in the technology, advertising, media and information segments, office space reconfiguration may not result in a significant reduction in overall space usage,” Moody’s said. “Increased emphasis on community spaces and amenities offsets much of the gains from open or denser space plans.”

Moody’s said much of the existing office stock can be reconfigured to provide amenities such as more natural light and better ventilation that today’s tenants seek. But increased density and other space reconfigurations require capital improvements. Greater density may demand additional and faster elevators, larger bathrooms and increased electrical capacity for more computers, for example.

In addition, HVAC systems could need upgrades to provide good ventilation. In addition, suburban office properties where employees rely on cars to get to work will require additional parking as occupancy becomes denser, Moody’s said: while three or four parking spaces per 1,000 square feet worked in the past, many current layouts will require six or more spaces per 1,000 square feet.

“Landlords can address a parking deficiency in several ways,” the report said. “Parking decks can be built above existing surface parking, but this can be an expensive solution. Other solutions include acquiring nearby sites for additional parking, providing a shuttle service to a nearby parking facility, encouraging car-pooling or acquiring adjacent properties with excess parking.”