I’m penning this column from one of our great U.S. cities, Chicago.
The scale of the downtown area is overwhelming. Massive skyscrapers rise from the banks of the Chicago River as it meanders toward Lake Michigan. The El bangs along rickety tracks in its endless loop around downtown. Of all the major metropolitan areas in our country, Chicago may be the most impressive.
As I walked Chicago this weekend, I was struck not simply by its size, but by its resilience. This is a city built around transportation, commerce and real estate. Yet the way each of those functions today bears little resemblance to the city that produced many of the magnificent buildings surrounding me.
Which caused me to wonder. What makes a piece of commercial real estate endure?
Is it the building, the location, the infrastructure surrounding it, or simply our willingness to imagine a different use when the old one no longer works?
Commercial real estate is littered with buildings constructed perfectly for yesterday.
Chicago provides plenty of examples. The city grew because of its strategic location, first as a connection between the Great Lakes and the Mississippi River system, then as a railroad hub linking eastern markets with the rapidly developing West. Commerce followed the transportation, people followed the commerce and real estate followed the people.
Sound familiar?
Southern California developed differently, but the fundamentals are remarkably similar. Our ports, freeways, airports, population and enormous consumer base created one of the largest industrial markets in the country. Manufacturers, distributors and logistics companies needed places to make, store and move things, and an industrial real estate market grew around them.
But markets change.
Manufacturing processes become more sophisticated. Distribution becomes more automated. Companies require more power, greater clear heights, better loading and fewer employees per square foot. Buildings that were state of the art 40 years ago can suddenly find themselves functionally obsolete.
Office buildings face an even greater challenge. Remote and hybrid work have changed the amount and type of office space many companies require. A magnificent downtown tower can still occupy a great corner, offer spectacular views and sit adjacent to tremendous infrastructure, yet struggle because the original assumptions upon which it was built have changed.
So what happens next?
Some buildings will continue doing exactly what they were designed to do. Others will be renovated and repositioned. Some may find entirely new uses, while others will eventually disappear and give way to something the original developer never contemplated.
We see the same thing happening in Orange County.
Older manufacturing buildings are being occupied by advanced manufacturers whose products their original occupants could scarcely have imagined. Corporate campuses are being reconsidered. Industrial buildings are being modernized. Office owners are wrestling with what their properties should become if traditional office demand never fully returns.
Which brings me back to Chicago.
Great cities endure because they adapt. The river that once moved raw materials now carries architectural tour boats beneath skyscrapers. Elevated trains designed in another century still rumble above streets filled with people carrying smartphones and ordering rides from apps. Buildings constructed for yesterday remain valuable because the infrastructure, location and human activity surrounding them continue to matter.
Therein lies the lesson for commercial real estate owners.
We tend to think of a building as a permanent asset, but its usefulness is anything but permanent. Markets change, technology changes, companies change and the way people work changes.
The dirt, however, remains.
And sometimes the greatest value in a piece of commercial real estate isn’t what it is today, but what someone can imagine it becoming tomorrow.
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104.