While creating open-ceiling/progressive space is trendy right now, it needs to be considered on a long-term basis and if really pays out in the end, Fleener tells us. “There is a demand for it, but it can cost upwards of $100 per square foot to reposition a suite into that versus $40 per square foot for traditional space. Is that $60-per-square-foot spread creating that much in rent increase? Is a 20% to 30% premium in lease rates for progressive space worth the 150% increase in TIs? On a short-term basis, you could argue no—long-term, bigger picture, yes. It really depends on the owner's hold period. In the end, it all comes down to rent and downtime (i.e., lease-up time).”

Assessing what you already have in a property before redeveloping it is crucial for both cost and time efficiency. Darrel Fullbright, commercial office building developers practice area leader for architecture and design firm Gensler, tells GlobeSt.com, “The key to a good repositioning project is to work with what you have as far as the existing infrastructure. Trying to impose a completely new direction can be costly, limiting your ability to maximize the building's value and your ability to attract tenants.”

Scott Wetzel of JLL's Orange County, CA, office, tells GlobeSt.com, “If there's one thing worth remembering, it's that function will always trump form. Nothing is better at keeping down costs than creating a space tenants love for years to come. It's no secret that renewing is much cheaper than re-tenanting.”

Most of redeveloping existing building stock is constrained by older equipment, aging infrastructure and inefficient building systems, Richard Gonor, EVP at JLL, tells GlobeSt.com. “However, these opportunities can sometimes provide a greater ROI and more flexibility in executing the leasing strategy. Today, financing a brand-new spec office building is relatively hard. Therefore, if you instead think about transforming a building, you can put it back on the market much quicker and generate revenue sooner.”

The tenants for these types of properties are across the spectrum, with the exception of traditional law firms, Jon Pharris, co-founder and president of CapRock Partners, tells GlobeSt.com. “The cliché used to be that these types of tenants needed to be in the 'creative' space like advertising, but today the next generation of office space appeals to most tenants.”

Griffin Cogorno, director of client services for Unire Real Estate Group, tells GlobeSt.com, “Tech is obviously leading the charge, but all companies are looking to be innovative and fresh. Tenants are not only trying to creative a better working environment; they are also using their space to recruit talent. The Y and Millennial generations want a nice place to work with amenities and even a gym.”

Many tenants today are seeking smaller floor plates in moderately sized buildings, Alexander Paul, managing director, national market research for Newmark Grubb Knight Frank, tells GlobeSt.com. “They also are seeking build-outs that have substantial natural light and an open floor plan. However, the benching set-ups that have become commonplace do not work well for all tenants—they may reduce productivity due to noise pollution and frequent interruptions. As a result, there is some pushback against recent design trends. The office design of today is not necessarily what will be most popular five or 10 years from now.”

Pharris says that renovating older buildings is more complicated than it seems. “Just removing the ceiling grid and carpet does not make a next-generation office environment. Tenants and their brokers are more discerning, and they will be able to see right through a mediocre effort. And, in many cases, you do not have a complete set of as-builts, so when you begin opening up the walls there are frequently surprises—good or bad—so make sure there is plenty of contingency in the underwriting.”

As with all new things, the costs of creative-office development go down over time, but redeveloping older spaces is expensive, with a large percentage of the costs due to new title regulations on efficiency, says Cogorno. “Tearing out older improvement and going contemporary may seem simple; however, sometimes the cleanest and most contemporary office is the most expensive to build out. Clients are requesting something different and almost unique to differentiate themselves.”

Paul says that tenants have made it clear during this cycle that they prefer high-quality, modern space and will pay for it to attract and retain talent. “Many are willing to pay more per square foot than on their previous lease, but they are consolidating into less space to conserve on overall occupancy costs. This densification of space is challenging developers who are upgrading older office product to improve not only the amenities of the property, but also the systems (HVAC, elevators, and more). Parking is also becoming stressed at locations that are not proximate to mass transit.”

For suburban buildings everywhere, parking is a tremendous issue, Renae Bradshaw, corporate managing director of Savills Studley's Chicago office, tells GlobeSt.com. “Buildings that were constructed 20 years ago were planned to be much less dense from a population standpoint. With today's open-officing plans, buildings are getting many more people in them. Bottom line, more people can get into the building than can park at the building. Dealing with this for older buildings and planning for it for new buildings are essential.”

Despite the pitfalls of creative-space conversion, this type of development is a necessity given the wealth of obsolete product in the market. In a study Paul and his colleague Bethany Schneider recently completed, they quantified suburban-office obsolescence using six factors: building location, building size, floor-plate size, amenities, building age (accounting for major renovations) and parking ratio. “The first three are generally incurable, at least without major expense. The last three can be addressed with capital expenditures, but those expenditures need to be made carefully to generate an acceptable return. We estimate that 14% to 22% of the US suburban-office inventory is obsolete, which translates into 600 million square feet to 1 billion square feet of space in the 50 largest US metros. The problem of obsolescence in the office market is growing, and renovating wisely in order to keep a property appealing and functional is critical to attracting tenants in a competitive landscape.”