Office Density Your Zoning Code Never Dreamed Of

By Eric Jay Toll

In the postrecession office environment, "creative" and "collaborative" workspaces are the new mode. Companies today — particularly in knowledge-based industries, technology, and life sciences — want open floor plans with minimally obstructed floorplates and much higher worker density. Office densification is an evolving trend with significant opportunities and challenges.

What do local zoning codes have to say on this topic?

Zoning falls behind

"I'm just not hearing planners talk about this as an issue," says Kirk Bishop, vice president at Duncan Associates' Chicago office. "I hear about office densification and I've heard about some issues, but I've not seen any rush to change regulations yet."

Both startup companies and major companies are increasing the number of workers in office environments. Traditionally, zoning regulations have based office parking, traffic, utility demand, and development standards on populations of three to four workers per thousand square feet of usable floor area. Today companies are pushing to double that number.

Opportunities include more economic development; challenges include infrastructure impacts. Impacts on parking, utilities and site amenities are being driven by commercial real estate brokers, interior architects, and mechanical engineers. Few planning departments look at the impacts of more workers in the same square footage. Zoning standards tend to be driven by building size, not the number of people working in the building.

"This is a trend that started before the recession, but is taking off," explains Dean Bellas, president of Urban Analytics, Inc., and adjunct professor of real estate at Catholic University's School of Architecture and Planning in Washington, D.C. "In 2005 in the (D.C.) area, the typical urban office allocated about 200 square feet per worker. By 2017, that's expected to drop to less than 180 square feet."

Brokers are already seeing that trend in markets in the West, Southwest, and Southeast. With properties capable of holding up to eight workers per thousand square feet, listings tout parking ratios of six to seven spaces per thousand square feet for Class A office space as compared to zoning regulations requiring three or four spaces per thousand square feet.

What tenants ask for

"Tenants are demanding the kinds of amenities planners have sought all these years," says Michael Starling, director of economic development for Dunwoody, Georgia. "We're a former edge city (of Atlanta) now looking at urbanization. Tenants are demanding, and developers are building, amenities like on-site parks, restaurants, a walkable environment, and access to public transit. These are features planners have called out as necessary for quality communities. They are now minimum standards to attract quality tenants."

Starling says that even older office buildings are upgrading lobbies, adding green space, and providing free shuttles to Metropolitan Atlanta Rapid Transit Authority stations. "State Farm paid a premium to build its new one-million-square-foot regional corporate headquarters on top of a MARTA station," he adds. "We're seeing owners building parks or locating near city parks, trails, and developing amenities such as gathering spaces, fitness centers, and places to eat."

State Farm Insurance, based in Bloomington, Illinois, takes the same tack in Dallas and in Tempe, Arizona. Its two-million-square-foot Arizona campus sits on the shore of a large urban lake with an extensive trail network.

"We're building a 40,000-square-foot plaza with seating, Wi-Fi, and space for an event venue," explains Richard Drinkwater, principal and senior architectural designer with DAVIS, the architectural firm charged with designing Marina Heights, State Farm's new western regional headquarters. "We're building restaurants, a fitness center, training rooms, and open floorplates," he says. "There is a lot of bike parking and public space."

Tempe plans to add a station for its downtown trolley to connect the 6,000 State Farm workers at Marina Heights to Metro, the Phoenix area light-rail system.

Dunwoody has several projects that include fast-casual restaurants on pads in the office campus parking areas — similar to traditional retail center design. Dave Seeger, a broker with Jones Lang LaSalle in Phoenix, says he's heard of that concept in Minneapolis and in urbanizing suburbs.

Office developers are responding to tenant demands. "We're building Mach One (an office campus) dedicated to a happy and healthy employee," reports Sven Tustin, vice president of development and investment for Trammell Crow Company's Arizona business unit. That Chandler, Arizona, office campus is designed from the ground-up for collaborative and creative workspaces. "We've designed the building to handle 6.5 workers per 1,000 square feet. To make this work, we have amenities to help tenants attract and retain employees," Tustin adds.

Mach One is located in a suburban market with little access to public transit, but easy access to freeways. About half the spaces in the surface parking area will be covered — a coveted amenity in a desert city. "With that much parking, it's a long walk from parking spaces to the office," says Tustin. "We're building tree-lined and shaded walkways through the parking lot. Other amenities include collaborative space in the lobby and outdoor green areas, all with Wi-Fi access."

"Tenants are really focused on the quality environment of a building and its setting," explains Katie Ekstrom, a vice president in the Austin, Texas, office of CBRE, a national commercial real estate brokerage. "We have one new building going up, and two historic buildings being renovated," she says.

"Tenants want lots of light, so the few hard-wall offices are on the interior," Ekstrom notes. She talks about one tenant who installed all-glass dividers in the office so that natural light can reach all workspaces and every employee has a window view.

In addition to natural light, new-economy tenants want high ceilings and offices conducive to workgroups and Millennial working styles. One thing Millennials do not want is long commutes, obliging companies to look for work sites that combine housing and urban living — the heart of transit-oriented development. This is a major opportunity for central cities' older office buildings.

Retrofitting old offices

While the market is driving this change in new buildings, most regulations don't really apply. This creates challenges when an owner wants to convert older offices to meet newer tenants' needs.

Companies' second highest operating cost, according to Bellas, is the office lease. "Many companies are increasing density in order to decrease the amount of space they need to rent," he explains. "With newer buildings designed to accommodate those needs, older buildings are struggling to compete."

During the recession, market rents dropped to levels where companies in Class B and Class C office space could move up to Class A or Class B space for the same or even lower rents. Vacancy rates in older buildings skyrocketed.

The evolving Western trend is for older office buildings to be "demolished-to-shell" and redeveloped into Class A, collaborative workspaces. The campuses in outlying and suburban areas, usually with multiple buildings, are short on transit access and parking. Owners are literally demolishing existing buildings to provide surface parking for the structures that remain.

"It's more cost effective to demolish a Class C building, put in surface parking, and upgrade the remaining buildings to a higher lease value," says Tim Olson, a senior vice president with JLL in San Diego. "Accommodating six or more workers per thousand square feet increases the building value and generates an effective return on investment."

Applying "lipstick" to upgrade a building isn't enough. Olson says that Scripps Plaza, an office complex on Interstate 15 about 16 miles north of downtown San Diego, struck a positive note with tenants even before construction started. "We took a building that was nearly empty and have rented almost a third of it," he says.

The reason, he says, is amenities. "Renovation alone will not make a building attractive to today's tenants," Olson says. "We are building a 4,000-square-foot collaborative area with Wi-Fi and a lobby cafe. We've added a shower for bike commuters, locker room, and fitness center. We opened ceilings and created open floor flexibility."

In Phoenix, JLL is the broker on a similar project, Tempe 10/60. The former three-building, 90,000-square-foot Class C complex is being repurposed into a two-building 70,000-square-foot Class A campus. The recovered ground will become parking. "Parking garages cost $20,000 per space; it was more cost effective to tear down the smallest building" to make space for more surface lots than it was to build a parking deck, says Seeger, who is a managing director at JLL, Phoenix.

Zoning and redeveloping offices

"We haven't had any issues with (the city of Austin)," says Ekstrom. "The bigger challenges come when our engineers and consultants start looking at what it's going to take to convert an existing building."

Renovating and redeveloping offices has both upsides and downsides, says Bellas. "There are the benefits to the community in terms of economic development, and there are the costs imposed on community by the increased occupancy," he adds.

"Perimeter Center is different than the rest of our city," says Dunwoody community development director Steve Foote, AICP. "We saw the need to address development and redevelopment specifically for this area." The city, incorporated in 2008, appears to be one of the first to craft a zoning code covering office densification.

Rebecca Keefer, AICP, the city planner, says that Dunwoody plans to create incentives for height or density. "Considering changes in worker density is an issue that could be on the table," she says. If so, it appears to be one of the first communities to take that step — with Bishop and Duncan Associates as the consultant.

Existing buildings present special problems when redeveloped for higher densities. "Who thinks about elevator traffic?" asks CBRE's Ekstrom. "In one of our historic buildings, we're allowing high density on lower floors where stairs are an option. You can't add an elevator."

"Sometimes people don't realize the air quality problems coming from adding more people into a smaller space," says Tony Abate, vice president of operations for Atmosair, in Fairfield, Connecticut. "Mechanical systems suddenly become inadequate when worker population increases from the original rating," he says. "Go to an open ceiling and the (heating, ventilating, and air conditioning) system also has 20 percent to 30 percent more air to move in addition to what it has to exchange for the workers."

When the HVAC is "overpopulated," interior humidity builds up, affecting electrical equipment, transporting microbes, and creating an environment for mold.

"We've seen mold and spore problems in (high-density) offices where tenants have had to relocate," says Justin S. Dixon, president of Snyder Environmental, in Little Rock, Arkansas. "Older buildings may not physically be able to accommodate increased duct sizes. Roofs may not have been engineered to hold up a larger HVAC system."

When it's hot

Danielle Casey, economic development director for Scottsdale, Arizona, knows about the impacts of technology company migration into the city's downtown and riverfront area. A failed retail plaza, the Galleria, has become the hot tech spot partly because it adjoins Scottsdale's famous nightclub district. Microsoft and tech startups are among the firms gobbling up the available space.

"We've had a number of high-tech companies move into the downtown area," she says. "They're packing six, even nine employees per thousand square feet. It's completely revitalized the area, but taken every parking space. I've talked with executives, and they say the hip, urban atmosphere is what attracts and keeps employees."

Parking is just one problem. Peak hour traffic jams are another. Scottsdale has moved to articulated buses and a faster rush hour schedule to accommodate workers. There is much, however, to keep the employees downtown, with restaurants, clubs, and entertainment surrounding the workspace. Several developers are building upscale residential communities within walking distance of the job center.

The old Galleria is a successful conversion to creative work spaces that the tenants demanded. Some owners have had bigger challenges with old building infrastructure or undesirable locations.

Not all conversions will work. "On one project," says Dixon, "we determined the building infrastructure could not physically be upgraded to accommodate the owners' plans. They had to walk away."

As a result, some structures come down. "We've had some office buildings and shopping centers — and not that old a facility — demolished for new office buildings," reports Foote, the community development director in Dunwoody. Olson sees the same in San Diego.

Driving economic growth

Double the number of people working in an area and there's an immediate boost to the local economy. Bellas says that in addition to the multiplier of the construction and office furniture purchases, "you'll need more restaurants, more service businesses, and more retail to handle the increased employee population."

"We have nearly single digit vacancy rates for retail — and I don't think there is any open restaurant space in Perimeter Center," says Starling in Dunwoody, referring to a mixed office and retail campus that was built in unincorporated DeKalb County before the town formed. "In addition, it has really given a boost to the number of people who are using MARTA and other public transit. At the same time, it's aggravated an already challenging traffic situation. We're struggling for a solution."

At some stage in the evolution, the demand for infrastructure capacity is going to outweigh the ability to deliver the services in a timely way. Dunwoody has taken steps to act before that point is reached. Will other agencies follow its lead?

Eric Jay Toll is the economic development, banking, and finance reporter for Phoenix Business Journal. A retired planner, he spent 30 years as a planner and director with agencies in California, Nevada, and Utah.

Resources

Image: Scripps Plaza, an office complex 16 miles north of downtown San Diego, attracts tenants with amenities like a 4,000-square-foot collaborative workspace, Wi-Fi lobby cafe, fitness center, and more. Photo courtesy Jones Lang Lasalle.