James MacNamara, head of operating real estate strategies at Schroders Capital, kicked off a panel session on repurposing real estate at the IPE Real Estate Global Conference & Awards 2024 in Madrid by highlighting the growing importance of repurposing existing buildings.
MacNamara told delegates that, rather than just focusing on developing new properties, the industry needs to adapt to the changing demands of tenants and look for ways to optimise the use of existing structures. He stressed that instead of just building new, the industry should “work with the structures we have”.
MacNamara pointed out the environmental benefits of extending a building’s life and the challenges of adapting them to constantly “changing demands”.
Traditionally, real estate focused on the physical aspects, but now a “more holistic approach” is needed, he said. This includes considering the user experience and intangible elements that foster collaboration.
He presented an example in the form of a struggling secondary office building. Upgrades like solar-powered glass and recycled paper insulation were used to create a more sustainable and inviting space. Importantly, they also focused on “amenities, creating daily changing menus” and offering flexible-lease options.
MacNamara said these strategies are not just for prime locations. Landlords need to adopt a similar approach to all their buildings and this requires a new skillset, moving beyond the physical structure and embracing the operational aspects of managing a building, “much more akin to a hotel-type business”.
MacNamara’s presentation ushered in the panel discussion themed RE-purpose: Adapting Space for Tomorrow’s Requirements. The panelists included Audrey Camus, SVP of development and asset management at Ivanhoé Cambridge; Annette Kröger, Europe CEO of PIMCO Prime Real Estate; Javier Rodriguez Heredia, senior partner and head of real estate and development at Azora; and Coen van Oostrom, the founder and CEO of EDGE.
‘Fixed income is over for offices’
The days of treating offices akin to a fixed income investment – acquiring the asset and passively collecting income – is over, according to van Oostrom. The greater operational intensity of today’s modern offices, the rise of artificial intelligence (AI) and the need for data to manage the energy efficiency buildings is transforming the business of sector, he said. “Fixed income is over for offices,” he told delegates. “You must have the data – if you don’t you’re lost.”
Van Oostrom also said closer dialogue between tenants and landlords was paramount, but some firms were still launching funds, acquiring assets, outsourcing property management and “forget about the work” of keeping tenants happy.
Oostrom said he always tries to meet the CEO of the tenant company of a building acquired and often discovers that they have never met their previous landlords. This is the core issue that needs to change, he said.
A key aspect of the discussion revolved around cultivating a holistic approach to real estate management. MacNamara specifically enquired about PIMCO Prime Real Estate’s strategy for achieving this within their vast global portfolio. Kröger acknowledged the challenges of achieving uniform energy efficiency: “So the approach needs to be a different one. We need to find a framework and a strategy and clarity for all of our people for where we want to go, and this is true for sustainability. This is true for how we want our assets. And this is true how we want to think more holistically when we do develop assets.”
PIMCO Prime Real Estate invests across various sectors including direct and indirect equity in Europe, the US, and Asia Pacific, along with lending businesses in Europe and the US. The company embarked on strategic upgrades and long-term portfolio improvement strategies to tackle sustainability within the portfolio, Kröger said.
She explained that, when faced with tenant turnover, the firm prioritises retrofitting and upgrading specific assets to achieve high energy efficiency. “We can retrofit and upgrade to that efficient energy level and to create that product which we want to see by maybe spending 10% additional cost to achieve that.”
For the remaining portfolio, the focus shifts to exploring alternative solutions, she said. These solutions can include installing solar panels, implementing artificial intelligence for smarter building management, and other innovative approaches.
Kröger emphasised a long-term evolutionary approach. Upgrading where possible remains a priority, but PIMCO Prime also actively seek solutions to improve the overall portfolio’s sustainability. This ensures readiness for more extensive upgrades as opportunities arise.
Discussing Ivanhoé Cambridge’s approach to holistic real estate management, Camus said “we are very hands-on in the office market”.
Ivanhoé Cambridge, with C$77bn (€52bn) in real estate assets, invests internationally alongside strategic partners and major real estate funds. Through subsidiaries and partnerships, the company holds interests in 1,500 buildings, primarily in the industrial and logistics, office, residential and retail sectors.
Camus said Ivanhoé Cambridge had committed to achieving net-zero carbon emissions by 2040 and had already begun implementing a plan for each asset within the portfolio. “This target will, of course, be reached through new investments and through the existing portfolios on which we have to spend a lot of capex,” said Camus.
While acknowledging the capital expenditure intensity, Camus said it was necessary “to put the assets on the market to preserve the value and for us as long-term investors, because it’s important for us as well”.
Explaining how Azora executes its repurposing and multi-use strategy Heredia said the firm has multi-asset skills, with “specialised investment and asset management teams in residential, senior housing, logistics, office, retail and hospitality”.
Heredia emphasised Azora’s focus on creating value by controlling the full value chain of the assets. This involves an “in-house conceptualisation and development team”, which has invested more than €1.7bn in retrofitting assets over the past five years.
He explained Azora’s approach to repurposing assets: “First of all, we have a deep understanding of all the zoning, planning and local norms. When we see an asset, the first thing is to see its full potential and the alternative uses it can have.”
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