Tall Buildings Value Perspectives Salford December 2010 - Professor Ali Parsa

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Tall Buildings:

value perspectives

Ali ParsaProfessor in Real Estate

School of the Built EnvironmentUniversity of Salford

[email protected]

Introduction

Tall buildings in context

Tall buildings project

Methodology

Tall buildings characteristics

Literature on rental evidence and 9/11 effects

Do tall buildings command a premium?

Interview findings

Conclusions


Recent estimates suggest that that half of the world‟s population now lives in cities, compared with only 2% in the year 1800 and 35% in 1970, it is important to understand what the key factors are that are crucial to the long-term success of any city

It is anticipated that by 2010, 70-80% of the world‟s population will be living in cities and urban conglomerations. In such a scenario the tall building may well become the usual built form, not by choice, but by default (Yeang, 2002)


Within ten years it is estimated that there will be at least thirty cities with a population of over ten million, of which twenty two will be in developing countries and the majority of these will be in Asia.

These figures suggest that the city of the future will have to diversify and change in order to cope with the increase in population and also urbanisation.


Many industrial cities have already begun this process through intense regeneration programmes.

The reality is that cities can turn their fortunes around, often with surprising speed if they get the formula right, for example, Dublin, Barcelona and Helsinki in Europe and looking further afield Shanghai and Dubai are also undergoing an urban renaissance

mailto:[email protected]

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The desire to construct tall buildings is not a new phenomenon. One of the earliest literary manifestations of building tall comes from the biblical description of the buildings of the tower of Babel.

This passage in the bible has given its name to that motivation and trend for building to reach ever increasing heights.

This innate desire has become translated into different motivations. For example, Le Corbusier‟s vision of „cities in skies‟ or the developer‟s desire to maximise economic returns from city centre land development - through technological innovation and the invention of the skyscraper (BDP, 1995:110 )


Geddes (1974) suggests there are many reasons for the introduction of tall buildings, which may describe the condition of a society. They include:

The basic aspiration of man to build tall, stimulating engineering and architectural ambition.

The redevelopment of towns and cities for varying reasons, from slum clearance to regeneration, partly sociological, political and partly big business.

Economic and financial considerations as assessed at the time of decision.

The hope of achieving higher densities of population in an agreeable manner and the conservation of land.

Tall Buildings Project

Aim: To undertake a comprehensive study of tall buildings globally focusing on strategic real estate strategies

Objectives Define iconic architecture – including urban form, cultural

icons, „star architects‟ and skyscraper evolution; Identify tall building characteristics – including construction,

building height, green buildings and profitability issues; Examine high rise office markets – including spatial patterns,

business cycles, rental levels and occupier/investor perspectives; Analyse high rise residential perceptions – including tenant

satisfaction and view premiums; Evaluate the threat of terrorist attack – the impact on cities,

urban form and real estate location.

Tall Buildings Project: Methodology

Combination of qualitative and quantitative research approaches comprising 8 work packages

Work package I

comprehensive literature reviews - Bringing together information for WPI and specifically input literature from a location/metropolitan perspective and from the property side examining occupier and investor issues including performance indicators.


Work Package II

Develop strategic model of what defines an iconic commercial architecture office building.

The identification of factors that distinguish or separate the iconic commercial office structure from other high rise buildings.

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Work packages III and IV

Inventory of all high rise buildings in the world utilising databases and other studies that have done this already (world-wide) and completion of

First level profile information to include:name of building, address details, number of storeys from ground level (below ground level would be recorded separately), height, year opened, square footage (sq m), use and architect

Second level characteristics which would include the following:ground coverage, FAR, floor plate size, construction type, external finishings, development team, tenancy/ownership, occupier mix, rental levels, proximity to public transport, numbers working in building


Work package V

Quantify the scale of high rise office buildings in each metro, country, continent and globally, on a year by year basis from at least 1900 if not before.

In this regard, a parallel companion research project will generate a great deal of the basic office market inventory information.

Through the database of high rise buildings, as described above, the market share of high rise buildings over time can be determined.

Similar analysis undertaken for iconic commercial office structures over time. From this analysis relative rent rates that high rise buildings may command relative to overall market rates will be calculated.

In addition how much iconic commercial office structures may command in rents, relative to overall commercial space will be quantified


Work package VI

Based on the reviewed literature a series of structured discussion and interviews conducted with national and international key market participants and stakeholders to provide a further understanding of the reasons for the attractiveness associated with this characteristic architectural feature (tall building structure).

The aim is providing an insight into the high-rise architectural practice in London and the City of New York, the focus of this study


Work Package VII Building from the literature review and other

investigations, including interviews with key stakeholders as above stated, strategic models developed of high rise buildings generally and iconic commercial architecture specifically from the following perspectives:i. How metro economic development strategy in its shape and form is stimulated by high rise buildings and iconic commercial architecture specifically. Do high

rise buildings make a metropolitan area more or less appealing? ii. Corporate space user tenancy priorities and strategies, in relation to high rise buildings and iconic commercial architecture

Tall Buildings project: Methodology

Work package VIII

Project the likely market of future high rise commercial office structures on a metro, country, continent and global basis on a year by year basis through 2020 and by five-year increments from 2020 through 2100.

The objective is to develop probable rents and occupancy levels for this type of structure overall.

The major focus of the subject of study is to project the supply of the high rise inventory and iconic commercial office building inventory going forward

Tall Building Characteristics: key research questions

What is the optimum building height for an office building?

Does the green building agenda significantly alter the costings of a tall building?

How does construction cost vary with building height?

How do high rise construction techniques differ from traditional low rise?

Does building height affect profitability?

Does building height affect building efficiency?

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Tall Building Characteristics

It is important to comprehend that the success or failure of many tall building projects can be traced back to the specific features incorporated therein and the initial design decisions taken at the project outset.

This has become even more significant given the recent structural problems experienced at the WTC following terrorist attacks and the increasing environmental pressures incurred through the quest for „sustainable‟ or „green‟ buildings.

Spending money upfront on green technologies can have a significant impact on the long-term net benefits.

Strong link between building height and profitability, each of which can be influenced by what is occurring within global economies.Santosa et al (2003), Picken, D.H. & Ilozor, BD (2003), Wener, R & Carmalt, H (2006)

High Rise Office Markets: key research questions

Do tall buildings still retain investor confidence?

How has the spatial pattern of high rise offices changed?

Is there a positive correlation between rental levels and building height?

How has occupier perceptions changed since 9/11?

Is there a correlation between business cycles and number of high rise buildings constructed?

Are occupiers willing to pay a premium to occupy upper or lower high rise office floors?

Tall Buildings : history of development

year completed in bands

2000 onwards

1990-1999

1980-1989

1970-1979

1960-1969

1950-1959

1940-1949

1930-1939

1920-1929

1919 and earlier

Fre

qu

en

cy

2,500

2,000

1,500

1,000

500

0

year completed in bands

Tall Buildings : development by continent 1970-1979

Continent

South AmericaNorth AmericaEuropeAustraliaAsiaAfrica

Fre

qu

ency

500

400

300

200

100

0

Continent

year completed in bands: 1970-1979

Tall Buildings : development by continent, 2000s

Continent

South AmericaNorth AmericaEuropeAustraliaAsiaAfrica

Fre

qu

en

cy

1,500

1,000

500

0

Continent

year completed in bands: 2000 onwards

Literature: rental evidence

Variation in rental by floor

Grimaud (1989) assumption of floor rent is the same at all levels

Lui and Chang (2004) large differences in floor rents based on accessibility, view and security

Economic agglomeration is higher in the CBD or lower stories of the same building (Lui and Chang, 2004)

Location and physical characteristics, land use, intensityof development impact upon price (Colwell and Munneke,2006)

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The Threat of Terrorist Attack

The reality of the September 11th, 2001 attack on the World Trade Centre in New York is that tall buildings the world over are now viewed as potential terrorist targets.

Knock-on effects on the high rise office market, with various protagonists prematurely proclaiming the end of skyscrapers.

Negative views now appear misplaced there is a realm of uncertainty which could make the market prone to change.

Important to consider the financial implications on office markets including rental levels, insurance premiums, and vacancy levels determining the full extent of the WTC aftermath and factors such as corporate real estate location choices and urban form contrasting a pre and post 9/11 era.

Demisi, SV & Baen, J (2005), Dermisi, SV (2006), Laing, AM (2003), Reid, J (2004)

Literature: 9/11 impact questions

Will corporations continue to concentrate employees in downtown locations?

Will corporations keep headquarter offices at prestige downtown locations?

Will security and insurance costs lead to a re-consideration of downtown locations?

Will rents be lower and discounts higher to attract and retain tenants?

Will rising costs lead to decentralization of activities?

Will employee concerns influence future site selection?

(Johnson & Kasarda, 2003)

Data

CoStar data for the NYC market for 2007

For this study, data on existing office buildings only

Sample size of 3406 buildings

Location: 2676 (78.6% Midtown)

440 (12.9% Downtown)

209 (8.5% Uptown)

Tall buildings: 30 stories and above: n=260

Analysis based on rental evidence reduces the usable dataset to 784 office building, 108 of which are tall buildings and all located in either Midtown or Downtown

Rental Analysis of Office Buildings in New York City

Analysis: Rental Analysis Tall Buildings

range $38sqft to $250sqft: s=$42.83sqft

mean = $84.74sqft: median $75sqft

rents are significantly higher in Midtown ($95.56sqft) than Downtown ($55.25sqft) (t=5.778)

Within Midtown, the highest rents are in the location with the highest concentration of tall buildings (Plaza)

Class A tall buildings ($90.19sqft) have rents significantly greater than Class B ($55.55sqft)

Interactive effects between location and class: Class B tall buildings in Midtown ($69.09sqft) have a higher rent than Class A in Downtown ($60.94sqft)

Age differences: newer tall buildings (1980 onwards) have a higher rent ($110.20sqft) than pre-1980 tall buildings ($80.55sqft).

Analysis: Comparative Rental Analysis

Do tall buildings command a rental premium? There is mixed evidence

mean = $84.74sqft: for tall buildings is statistically greater than that for offices below 30 stories ($60.07sqft)

Midtown: the rental difference between tall buildings ($95.56sqft) and other offices ($59.75sqft) is statistically significant (t=6.393)

In prime sub-markets eg Plaza the differences in rent between tall office buildings and other offices is not statistically significant.

Only two submarkets in Midtown: Grand Central and Times Square have significant differences in rents between tall buildings and other offices

Downtown: tall buildings attract a lower rent ($55.25sqft) than other offices ($63.84sqft) though difference is not statistically significant

Analysis: Comparative Rental Analysis

Do tall buildings command a rental premium? The mixed evidence continues

Age differences: tall buildings have higher rents (statistically significant) than other offices for both new (1980+) and older (pre-1980) property.

Class: no significant difference in rent between Class A tall buildings and Class A other office property (same for Class B)

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Literature: 9/11 impacts

Several studies have shown that metropolitan CBDs are more resilient.

Miller et al (2003) high rise buildings continue to exhibit the same fundamentals that made them successful before 9/11 with most tall buildings continuing to command a rental premium

Dermisi and Baen (2005) benefits of locating in the CBD seem to outperform the suburbs

Dermisi (2006) effect of 9/11 more diverse with a lack of interest by business to locate in shadow areas.

Dermisi and Abadie (2006) increase in height associated with an increase in vacancy placing doubts on tall buildings

Interview findings

Tall buildings help create an identity

High rise buildings stimulate city/metro‟s status

They can inform an overall strategy

A big mass/cluster of buildings can be very impressive

Can create a buzz and facilitate business conduct

(Example: Asian and Middle Eastern cities)

Interview findings Investor appeal perspective

Spread of tenants

Spread of leases

Spread of risks

Investor risk factors Higher capital costs

Concentrates risk (all eggs in one basket)

Difficulty in letting a large volume of space coming onto the market

Depreciation is perceived to be high

Interview findings

What motivates occupiers to take office space in tall buildings?

Depends on the company strategy and the country or the market they operate in

There is status associated with tall buildings with high quality and a brand quality

Interview findings

What type of corporations seek to locate in tall buildings? Financial services companies –

top lawyers,

advertising,

merchant banks,

hedge funds

Interview findings

Two Types of Occupiers I) smaller occupiers taking only one or two floors in

buildings with landmark status and prestige. They want the prestige of the address. Often boutique international law and financial firms who enter London and the UK and need to be in such prominent addresses

II) Organizations (majors) looking to consolidate their headquarters, e.g. City Group Building, HSBC etc. Tall buildings offer efficient solution to take up 1.5-2 m sq.ft in Canary Wharf Tower

In the City only two buildings with 0.5m sq.ft floor area

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Interview findings

Iconic commercial architecture may influence occupiers

Large corporations who want the status would pay a “limited” premium

In the main tall buildings do not generate excess or abnormal returns

Tall buildings with exceptionally high floor area and good views attract higher returns

Institutional investors and funds do not go for tall buildings

Most investors and funds would need a very large portfolio to include tall buildings

Interview findings

Tall buildings will continue to dominate the skyline of cities

Politicians and civic leaders will continue to encourage the development of tall buildings

Globally increased pressure on land and population growth will create demand for high density and tall buildings, but there is need for: New ideas, innovation in design and engineering Technological change in softer services – e.g.

communications, climate control Environmentally responsive and sustainable buildings

Top 21 Tall Buildings 1 Burj Khalifa (newly completed)) 2 Taipei 101 3 Petronas Tower 1 4 Petronas Tower 2 5 Sears Tower 6 Jin Mao Building 7 Two International Finance Center 8 Citic Plaza 9 Shun Hing Square 10 Empire State Building 11 Central Plaza 12 Bank of China Tower 13 Emirates Tower One 14 The Center 15 T & C Tower 16 Aon Centre 17 John Hancock Center 18 Burj al Arab Hotel 19 Chrysler Building 10 Bank of America Plaza 21 Telekom Malaysia Headquarters

Top 20 Under Construction

1 Mile High Tower (working name) 2 Burj Mubarak al-Kabir Mubarak Tower 3 Russia Tower 4 Incheon Tower 5 Chicago Spire 6 China 117 Tower 7 Millennium Tower World Business Center 8 Lotte Super Tower 9 Doha Convention Center Tower 10 Freedom Tower - One World Trade Center 11Pentominium 12 Busan Lotte Tower 13 Shanghai World Financial Center 14 Abraj Al Bait Towers 15 International Commerce Centre - Union Square 16 DAMAC Heights 17 Al Hamra tower 18 Ryugyong Hotel 19 Shard London Bridge

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Tall Buildings : conclusion

The evidence suggests that tall building strategies are evolving from a combination of developer, investor and occupier interests and that their respective perceptions may be converging in the current evolution of tall building strategies.

These strategies also appear to have some very similar characteristics irrespective of their precise location: they are highly international.


Developer strategy and perceptions of profitable development appear to be converging with growing demands from investors, tenants and occupiers for premium space for business activity and investment returns.

In the development or occupation of tall buildings, the height of the building is important in defining the sense of prestigious business status, but other attributes of the building are necessary for the tall building to be attractive to investors and occupiers


Other critical attributes are: prime location, innovation in the architectural

qualities of the building rather than its tallness, the beneficial qualities of the configuration of the internal space for particular businesses, and the economic calculations of returns to both investors and occupiers.

The location, the business performance of the built space and the cost and investment performance of the building will usually predominate in real estate strategy over the iconic status of the building.

THANK YOU

Ali Parsa

E-mail: [email protected]

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Tall Buildings Value Perspectives Salford December 2010 - Professor Ali Parsa