As far as real estate goes, the mentality is often that a newer building is a better building. This makes sense, considering what kind of issues older buildings present: older buildings require renovations and maintenance to keep them functional, they are more susceptible to environmental damage and pest infestations, they can be less functional if they operate on outdated technology and they can be much harder to sell, depending on their local market. However, some buildings constructed before 1950 have overcome these issues and are even considered to be desirable properties with character. In this commentary, DBRS, Inc. (DBRS) looks into the value that historic buildings hold, what property types benefit the most from a classic appeal and what markets most revere architectural history.
The key characteristics that give older buildings value are their locations and whether or not the property has a historic landmark distinction. Properties like Toronto’s Distillery District, Chicago’s Civic Opera Building and New York City’s Colman Building hold a heritage title, whereas many buildings constructed before 1950 often fade into obscurity. While these heritage buildings tend to require more maintenance and renovation efforts, they can also demand more rent per square foot (psf ) and a higher purchase price. A potential property owner would need to decide whether it is worth the risk to invest in a liable asset or whether it makes more sense to invest in a vintage building.
Investing in a structure with classic architecture is most beneficial when applied to property types that emphasize their aesthetics, like hotels and other entertainment-based properties. Exhibit 1 outlines a sample of vintage hotel properties constructed in 1950 or earlier. Despite the structural age, the collection still holds an average appraisal value of approximately $87.8 million and draws an average revenue per available room (RevPAR) of $260. These hotels sport impressive numbers, even in their respective metropolitan statistical areas (MSAs). The three hotels located in Miami Beach, Florida, produce an average RevPAR of $384.63, which stands above the average Miami hotel revenue of $128.00. As well, the Portland, Oregon, hotels in the set have a RevPAR of $170.38 compared with the local revenue of $141.00. On the other hand, the sole Chicago hotel’s $191.00 RevPAR comes up short compared with the local $216.00 RevPAR.1 This trend continues in other hotel properties. In a sample of 46 pre-1950 hotels across the United States, the average daily rate was $257.60, whereas the national average was $130.33 (according to a report published on Statista). DBRS was unable to collect the national average RevPAR for pre-1950s constructs as well as the general market; however, daily rates and RevPAR information collected provides an idea of operating performance.
Contrastingly, office properties do not seem to age as well as hotels. In New York, for example, office properties constructed before 1950 demand an average rent rate of $44.68 psf. According to CoStar’s Q4 2017 findings, the average rent of New York City offices across all building classes was $65.96 psf. The specific New York neighborhood a property is located in also affects how well the property performs; however, looking at age alone as a factor, the averages demonstrate that the older buildings come up short as far as rent rates go.
The appraisal value across 17 pre-1950 office structures that DBRS analyzed from different MSAs averaged approximately $223.9 million. The exceptions to this trend are the Civic Opera Building (which is competitive within the Chicago market) and 500 Fifth Avenue (which outperforms the rental averages in New York and scored an appraisal value of $600.0 million).
Retail properties are another type that struggle to compete with newer buildings in their MSA when they are outdated. In a sample of four buildings evaluated by DBRS that were constructed before 1950, the average rental rate psf stood between $175.27 psf and $362.77 psf. Neither number comes close to competing with the New York City-wide retail average rental rate of $806.53, a figure collected from the Manhattan Retail Report, Spring 2018 published by the Real Estate Board of New York (REBNY).
The success of aged, mixed-use properties varies among DBRS-rated transactions, with Toronto’s Distillery District scoring the highest appraisal value and securing a reputation in the city as a must-see tourist attraction, versus other properties, like the 2 East Congress Street building in Tucson, Arizona, which scored much lower. The differences between the two may be the use of the property itself: the Distillery District is an emblematic piece of history in Toronto, housing entertainment venues and highend retail, whereas the Tucson property is a mid-rise multifamily complex. This might demonstrates that the novelty of an older building may only exist if its use takes advantage of its community’s history.
Chicago’s Civic Opera Building is the oldest property located on the west side of North Wacker Drive, according to a DBRS site inspection summary. DBRS’s summary highlights the aesthetic benefits of the classic Chicago art deco design that, for a building constructed in 1929, is a genuine original. The interior architectural details are protected by the building’s landmark status; they cannot be altered, preserving the gold metal grilles, elevator doors, ceiling moldings, etc. for as long as its status allows. All of these qualities factored into the $220.0 million appraisal value and average rental rate of $30.68 psf — competitive with Chicago’s $38.84 average rate.
In Toronto, the Distillery District became a coveted piece of real estate when it was reopened to the public in 2003 by a group of history-savvy city developers called Cityscape Development. Originally founded in 1832 as a Gooderham & Worts distillery operation, it now stands as a mixed-used property with retail outlets, cultural centers, restaurants and entertainment destinations. It is no secret that the biggest draw to this property is its fascinating Victorian Industrial architecture and great sense of history, making it one of Toronto’s biggest landmarks. The mixed-use site has an overwhelmingly greater appraisal value (CAD 165.4 million) than similar properties in the area (CAD 10.6 million on average). This is based on the site’s historical value, strong tenants and extensive renovations that keep the property operational.
There is a lot of maintenance that goes into the property to keep up the historic facade and ensure the building abides by federal and provincial obligations. Mark Halkias, the Senior Property Manager for the Distillery Historic District, explained that the idea behind the Distillery District was to convert the property to make it more user friendly and retail focused. Jamie Goad, a partner at Cityscape Development, explained that his group maintains the property with the same techniques and the same materials as were used in the era the site was constructed, saying, “We would certainly not modernize everything or disguise the original character of the property.” The maintenance functions to draw in foot traffic, which increases sales for retail tenants, improving the property’s performance in the market.
Unless the property is an entertainment-based asset or finds a way to take advantage of a building’s historic value, older constructs are not competitive with their newer counterparts in terms of rent rate psf, appraisal value and daily rates for hotels. This does not mean that all pre-1950 buildings should be retired — many hotels have successfully marketed themselves using their age to draw in visitors, and the Distillery District and Civic Opera Building stand out from their competitors precisely because of their age.
A copy of this report is available on the DBRS website or by contacting email@example.com.
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