An out-of-style building in the commercial real estate market is about as appealing as a polyester pants suit in a Manhattan nightclub. Subtract a few more points for shabbiness and that’s about what Jamie Herring found at 23 Orchard Road in Montgomery Township when he inspected the property, three buildings connected by a covered atrium, with an eye toward adding it to his real estate holdings.
ADR built the complex in the 1980s, and when Computer Associates acquired that company, in 1988, the building was part of the deal. But as Computer Associates’ business declined in the 1990s, it contracted its operations to a single floor, leaving the rest of the 234,351-square-foot property empty. Eventually the firm decided to put the building, which Herring describes as dirty, stale, and beat-up by that time, on the market.
Herring, owner of Herring Management, admits that purchase of the building was clearly a risky decision, but he tempered his risk by using low leverage on his bank financing. What’s more, he says that he acquired the building at an attractive price. Furthermore, his financial partner, JER Partners, provided the bulk of the equity that allowed him to upgrade the space to a Class A office building.
Herring’s original idea was to provide space for the larger players in the immediate area who had limited space, but the downturn made things harder. “Unfortunately, many of those players started to crumble or vacate the market shortly after our acquisition,” he says, “but we continued on our path of repositioning the property.”
He thought about converting one section to medical offices and using the balance for smaller tenants, but decided that was untenable due to the layout. So instead he decided to focus on the quality of the building rather than worrying so much about the demographics of potential tenants.
His first concern was the common areas like the entrance lobby, bathrooms, and cafe, which he knew had to be done in advance. “A tenant will walk into a building and make a snap judgment,” says Herring. “If it doesn’t meet with their image, they may not even want to walk into the tenant spaces.” The downstairs lobby, the only major common area that remains to be renovated, will be completed in summer 2009.
In addition to making upgrades, Herring decided to remake the building so that it would offer flexible options for prospective tenants.
First of all, to give tenants a sense of the light, openness, and size of the space, he demolished one floor from slab to slab — leaving a blank canvas where corporations can develop their own design.
Second, he dressed up space formerly occupied by Computer Associates. It already had work stations and was in “move in” condition. This option allowed Johnson & Johnson, one of the big tenants he was able to attract, to move into 50,000 square feet of temporary space immediately while he built out permanent space for them.
For smaller tenants, he created a “pre-built” space. Not only does this help convince prospects that the company can build acceptable spaces, but it also shows off the types of materials that will be used in all the spaces. “So a tenant can be reassured that they will receive the same lights, doors, ceiling, etc.,” says Herring. Eventually the pre-built space was leased to BlessingWhite, which was already a tenant.
The three-building combo was developed in an era when offices were divided into private, walled spaces, with the higher-ups yearning for the exclusive corner units. Herring had already spent years in real estate, first as head of management and leasing for Lasalle Partners and then as head of corporate real estate at RCN, where he worked for six years.
Musing about why 23 Orchard had gone to seed before he purchased it, Herring suggests that it went the way of many corporate office buildings occupied at first by just one company, but later sub-divided into multi-tenant complexes. The transition from a single corporate identity to an atmosphere where multiple identities can thrive can be bumpy, he says.
Another challenge for a large corporation that rents out a portion of its building is its own changing needs. “Computer Associates tried to lease space periodically during its 20 years of ownership,” says Herring, “but it was inefficient. They never knew their space needs, and they never gave their tenants the flexibility to expand. Their requirements always came first.”
The result is not just that a building like 23 Orchard Road ends up standing empty, or mostly empty, for awhile, but also that it acquires a physical and psychological stigma that makes commercial real estate agents shy away from it.
“Computer Associates had turned off the brokerage community to this asset,” says Herring, adding that not even new ownership turned things around immediately. It took about a year and a half for brokers to bring in big clients, confident that the space was appropriate and the building would show well.
As Herring stepped in to renovate and renew 23 Orchard Road, ultimately making $3 million in capital improvements, he approached the project from the outside in. The first problem was that the entrance was hard to see, which might turn potential tenants away before they even step inside. “The approach is very important,” he says. “A lot of tenants make up their opinions in stages.”
After consulting with architects about construction costs for physically reconfiguring the entrance, Herring decided on a simpler approach — redesigning the landscape to highlight the entrance. Louise Schiller, a landscape architect, helped with plantings, creating what Herring describes as “a softscape — colors and flowers at key points along the entranceway.” These, enhanced by orange and black sails, draw visitors into the main lobby.
The next question was what to do about the lobby and its classic 1980s mixture of colors and materials — black granite, green carpet, oak railing, track lighting, brown and black leather couches, green paint, plastic plants all over the place, and a vacated oak security desk. And bathrooms that were also 1980s vintage, and dirty to boot.
Keeping most of the existing black glass and the metal railings, he completely retiled the lobby and installed a fresh new earth-toned color scheme throughout the atrium to highlight the natural light it provides. He also added brightly colored, trendy New York-style furniture, hanging globe lamps, living plants, and more orange sails.
The atrium provides a common area for tenants, and houses the full-service cafe, open for breakfast and lunch, which serves between 250 and 350 people a day — and that number may bump up as the J & J corporate services group brings in more people. “They do a lot of business and are actually very good,” says Herring. “I go there without fail every day that I am in this office.” To add life and color, Herring has allowed area nonprofits and arts organizations, including the Arts Council of Princeton, the School of Rock, the Waldorf School, and other Montgomery organizations, to use the space at no charge
The renovations to 23 Orchard Road kept environmental impact in mind, both in terms of materials and energy efficiency. The new ceiling tiles, carpet, and floor were almost entirely produced from recycled materials, the tile and glass used in the newest bathrooms are from recycled glass, and the paints from Mythic Paint, a new “green” paint store in Montgomery, are no-VOC. The new lights use much less power than the existing fixtures — in fact the 120-amp circuit that previously could handle only two T12 lights now hosts 60 Lithonia RT5 lights — and the lights turn on automatically when a person enters a room.
Herring also added amenities that fitness-minded corporate workers like, including an exercise studio, and a gym with machines. A mini-basketball court, and a regulation volleyball court and softball diamond were already present on the site, the diamond has a fair chance of being replaced by a parking lot in the future.
To the left of the lobby, Herring installed an additional elevator, with a window to the outside, to improve access to the building’s three stories. The building already had three elevators.
Also implemented as part of the renovation was a building management system from KMC Controls that reduces both energy costs and usage and lessens the drain on the electrical grid. The system measures outdoor and indoor temperatures and controls power usage for air conditioning and heating remotely and by zone.
Because compressors use the most energy when starting up, then stabilize at a lower level, the system stages the start ups of the 60 compressors in the system. Since PSE&G charges businesses based on their highest single usage of electricity, staggering the startups lowers this number and hence total electricity costs. Herring estimates that this new system is at least 10 percent more efficient than the old system, but it is too new to tell for sure.
The buildings at 32 Orchard are now 82 percent occupied and its Class A office space is priced at $23.75 per square foot.
Johnson & Johnson leased 112,000 square feet in April, 2008, for consumer products, then another 50,000 in December, 2008, for corporate services.
J&J went to a 90-percent-open floor plan with cubes, and 10 percent offices. “This was a new direction for them,” says Herring. He suggests there is a trend toward open floor plans based on the belief that they encourage more interaction among employees.
“Cube dweller” is a status toward which few aspire, but at least modern cubes, like those at 23 Orchard Road, are more comfortable than the original semi-walled-off offices. They feature wiring for workstations, sound attenuation, ergonomic design, modular furniture, and better air flow. They also enable outside light to filter throughout the office space, and they can be reconfigured because they are modular. At the same time “fixed” offices are not as permanent as they once were. Their walls can now be taken down and moved about as staffing needs change.
Johnson & Johnson is also experimenting with a “freedom workspace” where employees can choose to work either in the office or at home. This concept, a “hot seat” environment, does not give employees specified desks, but assures them that they will always have a spot from which to work when they choose to do so from the office. There are also common areas where people can sit in beanbags with a television playing in the background.
Joining Johnson & Johnson as a 23 Orchard Road tenant is Oscient Pharmaceuticals, a company with headquarters in Massachusetts.
For Herring’s firm the economic downturn has meant many fewer showings, but he is taking advantage of slower business to upgrade buildings and get approvals for new buildings.
Among Herring’s other properties is Bristol Commerce Center, an industrial park in Bristol, Pennsylvania, that he purchased from 3M in 2002. The site, which originally belonged to Kaiser Fleet and for three years was used to assemble airplanes for World War II, still has remnants of the old runway.
Herring started work on the Bristol site by demolishing a number of the ancillary buildings. Then he added loop roads and built loading docks at the 400,000-square-foot industrial space, which now serves as a distribution site for eight tenants.
Because 60 of the site’s 80 acres were not being used, he subdivided them into five parcels and obtained approvals from Bristol Township to build 620,000 square feet of warehouses/distribution or data center space. Once approvals were in hand, he faced a challenge, particularly given the tight economy. On the one hand, potential tenants do not give landlords much lead time, so preparing the site and constructing the building would give him the best opportunity of landing a tenant. On the other hand, laying out capital on a speculative basis is risky.
The compromise he decided upon was to prepare the site work and build pads, realizing that with the pads in place, a single-story building could be raised in just six months. “The bulk of capital to construct the buildings is best not placed in cement and steel until we begin to see more prospects seeking space,” he says.
Herring also owns two buildings in Parsippany, one 93 percent leased and the other 83 percent leased. “We’ve done a couple leases in the last six months,” says Herring, “but we also lost two tenants.”
Herring grew up in Princeton and attended Princeton Day School. His father, H. James Herring, is a scientist and a principal at Dynalysis, and his mother, Carol P. Herring, is a vice president at Rutgers University and president of the university’s foundation. Jamie Herring received a bachelor’s degree in political science in 1986 from Johns Hopkins University and then a master of business administration, focusing on finance, from Columbia University. He started Herring Management eight years ago.
Herring’s wife, Kathy, is a businesswoman in her own right, also headquartered at 23 Orchard Road. She is co-owner of Twin Hens with Linda Twining, whom she met when their children went to Cherry Hill nursery together (the Herrings have three daughters). Both cooking school graduates, they started out in business as a frozen meal delivery service. Based on the popularity of their chicken pot pies, they decided to focus on chicken, beef, and vegetable pot pies.
Now with revenues of about three-quarters of a million, they sell nationally to Whole Food and Dean & Deluca and locally to the Whole Earth Center, McCaffrey’s, and other stores. As they got larger, they had to get USDA approval. For awhile they did a bit of a merry-go-round to appropriate kitchens, moving from Linden, New Jersey, and then to Maine, but now they are settled in a new business incubator in Bridgeton, the Rutgers Food Innovation Center, and in another kitchen in Seattle, Washington.
Asked about the current prospects for commercial real estate, Herring notes that the sector clearly lags in the economic downturn; the sector is not only not expanding but in some cases shrinking.
Herring distinguishes between the current climate and that of the downturn in the late 1980s and early 1990s. “We are not in a situation where there has been overbuilding as much as that existing properties have been acquired at inflated prices, based on rosy lease-up assumptions,” he says.
To buy buildings at high prices, owners received financing that paid their debt service in the interim. But as funds for debt service disappeared and banks’ underwriting requirements became more stringent, some commercial property was left exposed as current rents couldn’t support the high prices paid for the buildings. The result is that banks have taken some properties back and are selling them at discounted prices.
For some, this means an opportunity. “It’s a good time for those owners not highly leveraged,” says Herring, adding that Princeton is as resilient as anywhere.
Herring Properties, 23 Orchard Road, Suite 201, Skillman 08558-; 908-874-5400; fax, 908-874-5498. James P. Herring, owner. Home page: www.herringproperties.com.