The Kensington Business Centre

Tulsa, Oklahoma

Project Type:Mixed-Use/Multi-Use

Case No:C027014

Year:1997

SUMMARY

An 814,000-square-foot mixed-use development in suburban Tulsa. The business center represents the conversion of a former upscale retail mall, completed in 1984, to office use. A single, large, high-technology tenant occupies what used to be the entire mall except the space formerly occupied by Dillard's department store, the sole retail anchor for the former mall. Two other office tenants (one a bank and the other a high-tech firm) occupy what used to be the department store. A 407-room former Sheraton hotel is now the Marriott Southern Hills, a totally refurbished, full-service business hotel with 382 rooms and 43,000 square feet of meeting space. In addition to cosmetic changes, the hotel rooms have been reconfigured and wired to accommodate voice and data transmissions via modems, facsimile machines, and the Internet. The 183,000-square-foot office tower and 51,000-square-foot linear shopping center have remained largely unchanged since their openings 13 and 20 years ago, respectively. Phase II, for which plans are underway, is expected to add another 228,000 square feet, for a total of 1,042,000 square feet.

FEATURES

Former retail mallAdaptive use of retail to office spaceSuburban mixed-use developmentFull-service business hotelAll-cash deal; no financing involvedState-of-the-art telecommunications and computerized management systemsRetail annex to serve Kensington Business Centre

The Kensington Business Centre

Tulsa, Oklahoma

Project Type: Mixed-Use

Volume 27 Number 14

July-September 1997

Case Number: C027014

PROJECT TYPE

An 814,000-square-foot mixed-use development in suburban Tulsa. The business center represents the conversion of a former upscale retail mall, completed in 1984, to office use. A single, large, high-technology tenant occupies what used to be the entire mall except the space formerly occupied by Dillard's department store, the sole retail anchor for the former mall. Two other office tenants (one a bank and the other a high-tech firm) occupy what used to be the department store. A 407-room former Sheraton hotel is now the Marriott Southern Hills, a totally refurbished, full-service business hotel with 382 rooms and 43,000 square feet of meeting space. In addition to cosmetic changes, the hotel rooms have been reconfigured and wired to accommodate voice and data transmissions via modems, facsimile machines, and the Internet. The 183,000-square-foot office tower and 51,000-square-foot linear shopping center have remained largely unchanged since their openings 13 and 20 years ago, respectively. Phase II, for which plans are underway, is expected to add another 228,000 square feet, for a total of 1,042,000 square feet.

SPECIAL FEATURES

Former retail mallAdaptive use of retail to office spaceSuburban mixed-use developmentFull-service business hotelAll-cash deal; no financing involvedState-of-the-art telecommunications and computerized management systemsRetail annex to serve Kensington Business Centre

DEVELOPER

Phil G. RuffinRuffin CompaniesP. O. Box 17087Wichita, Kansas 67217

INTERIOR DESIGNER FOR UNITED VIDEO SATELLITE GROUP

Roseanne BellPage Zebrowski Architectsbellwether design ltd.320 South Boston, Suite 1400Tulsa, Oklahoma 74103918-584-2724

PROPERTY MANAGEMENT

Ruffin Properties7130 South Lewis, Suite 950Tulsa, Oklahoma 74136918-493-7100

GENERAL DESCRIPTION

The Kensington Galleria (now the Kensington Business Centre) site was originally purchased in 1974. In 1977, a linear shopping center (retail annex) was built to serve the galleria. The construction of the galleria itself did not begin until nearly nine years after the purchase of the site due to the double-digit mortgage rates that prevailed at the time. Finally, in February 1984 (May 1984 for the office tower), the original Kensington Galleria, including a 407-room Sheraton Hotel, was completed. At that time, Sakowitz, a Houston-based department store, was the sole retail anchor for the galleria, which was geared toward a high-income clientele in south Tulsa. The difficult times that fell on the retail industry in general were compounded by the failure of the galleria mall itself to capture its intended target market, which continued to patronize the more accessible Southland Mall. In the end, Dillard's department store (which took over the Sakowitz anchor space) vacated its space, leaving the galleria unanchored. Other retailers quickly departed as well.

With a pessimistic outlook for the Kensington Galleria's continued use as a mall, Phil Ruffin of Ruffin Properties, who purchased the property in December 1991 from the Resolution Trust Corporation (RTC) at a cost of only $12 million, saw the handwriting on the wall. The demand in Tulsa was for office space, particularly high-tech office space, rather than another mall. United Video Satellite Group (UVSG), a satellite communications giant with five large subsidiaries (Prevue Networks, UVTV, Superstar, SSDS, and Spacecom Systems) was enticed to move its headquarters from another Tulsa location to the Kensington Business Centre, where it would be the sole tenant for the entire former Kensington Galleria (and a small portion of the former Dillard's). After the lease with United Video was firmed up, conversion of the former mall to office use got underway. MicroAge, a value-added provider of computer services, and Tulsa National Bank also signed leases for space formerly occupied by Dillard's. With all tenants secured, conversion of the retail mall to office space accelerated. Ruffin, who already owned several Marriott Hotels, elected to expand his franchise to include the former Sheraton Kensington Hotel. He reflagged the property the Tulsa Marriott Southern Hills, an integral part of the business center.

By 1994, the Kensington Galleria was completely transformed into the Kensington Business Centre, an 814,000-square-foot mixed-use development in suburban Tulsa. Phase I consists of a 310,000-square-foot, 382-room completely refurbished Marriott Hotel (formerly the Sheraton); a ten-story, 183,000-square-foot GBA (164,000-square-foot NRA) office tower, which has undergone few changes since it was originally built in May 1984; and 270,000 square feet GBA (236,000 square feet GLA) of galleria mall space, which has been converted to office space for United Video Satellite Group, Tulsa National Bank, and MicroAge. Like the office tower, the linear shopping center remains virtually unchanged except for a change in the anchor tenant to Office Depot in 1995.

Preliminary analyses for potential uses for Phase II are currently underway. Although the office market in Tulsa is "hot" right now, with some offices renting for $15 per square foot and 1.25 million square feet of space absorbed in 1996 (a level not seen since the early 1980s), speculative development will probably not resume until rents reach $18 to $20 per square foot.

OFFICE MARKET CONDITIONS

The demand for office space that Ruffin Properties foresaw in its market analysis was based on some substantial evidence of a recovering Tulsa office market. For example, CityPlex Towers, the 2.2 million-square-foot monolith that for years had cast a 60-story economic shadow over the rest of Tulsa's suburban office market, is now over 90 percent occupied. Fueled by the successful leasing of the towers, office absorption reached 1.26 million square feet in 1996, a level not seen since the city's oil boom in 1983-1984. Absorption would have been marginally higher had it not been for some slight negative absorption in the downtown submarket.

The vigor of the office sector shows little sign of abating, with the telecommunications, aerospace, and manufacturingsectors driving employment growth in the Tulsa area. Indeed, Tulsa has achieved a reputation as a high-technologyemployment center because of a series of corporate relocations and expansions that followed the city's and state'sinvestment in high-technology infrastructure. The Williams Companies, a petroleum conglomerate, was a leader incapitalizing on Tulsa's high-tech focus. Indeed, Williams decided to use its unused oil pipelines as conduits forfiber-optic cables. The conversion of pipelines from oil to fiber optics signaled the birth of WilTel, atelecommunications giant headquartered in Tulsa. In 1995, LDDS Worldcom, another telecommunications giant,purchased WilTel and moved its operations headquarters and roughly 2,600 jobs to anindustrial-park-turned-office-complex in north Tulsa. UVSG—as a major player in cable television and satellitecommunications and a trendsetter in merging formerly unrelated communications businesses—has over 1,000employees in Tulsa and is well positioned for even more employment growth. Indeed, UVSG has filled the entireformer Galleria space and is expanding into the adjacent office tower.

In addition to high-tech companies, firms particularly dependent on sophisticated high-tech infrastructure have been inclined to locate to Tulsa due to the city's cutting-edge infrastructure and choices of alternative service providers. The growing list of such businesses include American Airlines' SABRE Group Reservations Center, First Data Corporation's card services center, Avis Rent-A-Car's WorldWide Reservation Center, State Farm Insurance's regional customer service and data processing center, Dollar Rent-A-Car's headquarters and reservations center, and Thrifty Car Rental's headquarters and reservation centers.

The aerospace industry is another growing sector in Tulsa. In 1996, the Boeing Company acquired Rockwell International Corporation's aerospace and defense businesses and, as a part of the deal, Rockwell's Tulsa plant. The Tulsa facility, which will do business under the name of Boeing North American, has added approximately 400 employees since spring 1996, although the number of employees at the plant is still below the 1988 peak of 5,000. The facility is under contract to Boeing to produce parts for the Boeing 737, 747, and 777 series commercial aircraft. The Tulsa facility will also manufacture power system structures for the International Space Station, the largest international venture in science and technology ever undertaken, of which Boeing is a prime contractor. The impact on the Tulsa facility of the Boeing and McDonnell Douglas merger is unknown at this time but adds a new variable to the equation.

The flurry of new firms locating to and expanding in the Tulsa area is fueled by operating costs that are well below the national average. For example, the commercial rates of Public Service Corporation of Oklahoma, the electric service provider for Tulsa, are among the lowest in the nation. Based on the level of demand, industrial customers may expect to pay between $0.03 and $0.05 per kilowatt hour.

How all of this increased office employment will translate into demand for office space is difficult to predict since conventional office space per worker ratios are no longer useful in an era of office hoteling, outsourcing, and so forth. However, that Tulsa will experience growth in office space demand is less subject to speculation than the specific amount of office space needed.

THE SITE

The 40-acre Kensington Business Centre site is located at 71st Street and South Lewis Avenue, less than a 20-minute drive due south from downtown Tulsa. The mixed-use project is just northwest of the 2.2 million-square-foot CityPlex Towers, formerly the City of Faith Hospital complex. To the north and west of the site is neighborhood shopping, office, and multifamily residential development. Farther to the west is the Arkansas River, which some analysts have blamed in part for the galleria's failure because it bisects the targeted retail market area. To the south are office uses, multifamily housing, and Oral Roberts University. To the east are high income single-family homes whose residents were the target market for the galleria mall's upscale boutiques. The site is located in the Lewis office submarket, one of the most dynamic office submarkets in suburban Tulsa. Ruffin Properties purchased all 40 acres, including the buildings, from the RTC at a cost of $12 million.

PLANNING AND DESIGN

The Kensington Business Centre combines office space and a business hotel in a megastructure built at grade level. The office tower is located in the building's southeast corner, the L-shaped Marriott in the northwest corner, and the department-store-turned-office-building in the northeast corner, with what used to be the retail mall in the center, connecting all office and hotel space. The 2,200 surface parking spaces in the first phase surround the building on the east, west, and south sides of the structure. The Office Depot-anchored linear retail annex is located at the southeast corner of the site. Planning for Phase II is currently underway.

All uses—office, hotel, and retail—in the original megastructure were fully integrated, with pedestrian links betweenthe mall and the department store and the mall and the hotel on two levels and between the mall and the officebuilding on one level. Escalators, elevators, and stairwells provided easy access between levels. The design capitalizedon the proximity of the different uses. Now that the Kensington Business Centre provides office space for a few largetenants, pedestrian movement has been restricted. For example, the mall's second level contained a food courtlocated near the hotel entrance to encourage pedestrian movement between the mall and the hotel. While employeesof UVSG (on the former mall) still enjoy direct access to the hotel, hotel patrons may not enter UVSG. Office toweremployees' access to the hotel via UVSG has been eliminated for security reasons. Now, office tower employeeswishing to enter the hotel must go outside and through the main hotel entrance.

In December 1993, Ruffin Properties began the buildout of UVSG's headquarters. The project followed UVSG'sspecifications, although Ruffin was constantly involved in the design process. Three of the entrances to the formerGalleria mall—one on the north and two on the south—were maintained as entrances to UVSG; however, their lookchanged entirely. For example, just inside the main (north) entrance, previously graced by a waterfall, colorfulbanners prominently advertise various UVSG products and divisions, and just inside the southeast entrance, formerlythe entrance to the atrium of the galleria, is the reception area for UVSG. The former food court now containsmodular office space for UVSG employees.

Vestiges of what used to be a retail mall are apparent throughout the UVSG headquarters. Staircases with landings that provide views of technicians busy at work replace the escalators that once connected the upper and lower levels of the mall. United Video's offices are organized around modular workstations that meet the needs of a particular function. Floor space per worker varies among the company's different subsidiaries. Despite the concentration of employees of some of UVSG subsidiaries in relatively small areas, the space-intensive requirements of the satellite transmission rooms, uninterruptible power supply rooms, telephone switching equipment rooms, and computer rooms resulted in an average space per employee of around 200 square feet.

Many of the small boutiques that formerly housed haute couture shops have been transformed into rooms that now house state-of-the-art telecommunications facilities. For example, multiple monitors and broadcast rooms allow the

Prevue Channel, part of the Prevue Networks, to deliver high-quality services. Other vestiges of the former mall include tall trees and plants on the lower level, enhancing the open atmosphere of the UVSG headquarters.

Dillard's department store also underwent considerable design changes in its adaptation to office space. Tulsa National Bank now occupies about one-half of the ground floor of the former Dillard's, whose conversion to a classic bank interior was facilitated by 14-foot ceilings and the imported marble floors originally installed in the space. The construction of drive-in facilities completed the major changes to the bank's space.

MicroAge, a value-added provider of computer services, leased the other half of the ground floor of the former Dillard's as well as a large share of what had formerly been the upper level of the department store. The second-floor lingerie department was transformed into MicroAge's reception area. An escalator (original to Dillard's) from an entrance on the east is the primary means of access to MicroAge's reception area and second-floor offices.

The Tulsa Marriott Southern Hills Hotel is centered around an atrium providing natural light and accented by a terra cotta and green color scheme, Oriental rugs, plantings, and brass railings. Original art works hang in the lobbies. With 43,000 square feet of flexible meeting space and 16 spacious meeting and banquet rooms, the hotel accommodates even the largest groups in one convenient location. Hotel conference rooms and restaurants are expensively finished and furnished. In addition to cosmetic changes to the guest rooms, the rooms have been reconfigured and wired to accommodate voice and data transmissions via modems, facsimile machines, and the Internet. Thus, the hotel has been transformed into a full-service business hotel. Before the renovations to the hotel, average occupancy was 48 percent at average room rates of $69.99; after the renovation, average occupancy rose to 65 percent at average room rates of $109.99.

The exterior changes were few, but they substantially changed the appearance of the building. First, in the former Dillard's and mall area, windows were cut into the glass-reinforced concrete walls to bring more natural light into the offices. The sunlight augments the already increased light levels made possible by eliminating walls in favor of modular office spaces. Second, the addition of a space frame as an architectural design element emphasizes the southeast entrance to United Video.

Despite the design changes to Kensington, the key to the project's feasibility was retention of the existing structure. If sweeping changes had to made to the original structure, then the costs would likely have outweighed the benefits, given that rents, albeit rising, had still not reached the levels needed to justify new construction.

ENGINEERING DESIGN

Advanced technology is incorporated in the engineering of the energy management, life safety, telecommunications, and security systems of the Kensington Business Centre. The energy management system monitors the temperature within each zone and makes adjustments accordingly. The system manages air handling, the operation of mechanical and electrical units, and routine maintenance. The building's energy efficiency is improved by a well-insulated concrete roof. The life safety system features a state-of-the-art audible notice and alarm system. To entice high-tech tenants to occupy the former mall space, Ruffin installed a state-of-the-art fiber-optic terminal with access for all tenants, although not all currently use it. One unusual engineering feature is the shared central plant, which serves the hotel, the former mall, and the office tower.

LEASING AND MARKETING

The leasing of Kensington Business Centre drove the deal. UVSG signed a ten-year lease for approximately 75,000 square feet, which it later expanded to 200,000 square feet. Thus, the office space was significantly preleased before conversion, although considerable preleasing was not a condition of financing because Ruffin Properties as owner financed the project in an all-cash deal. The former anchor store (70,000 square feet) was also completely preleased before completion of the conversion. New leases in the Kensington Business Centre now run around $15 per square foot.

With the Kensington Business Centre 100 percent occupied and Kensington Office Tower 98.5 percent occupied, current marketing activities are directed at maintaining positive tenant relations. Other maintenance marketing focuses on commercial listings in trade publications.

The Southern Hills Marriott is major element of the Kensington Business Centre, although it is a separate operating entity. The hotel is marketed to the business community. It has a full-time sales and marketing staff that actively seeks to bring conferences to the hotel through face-to-face meetings with individual organizations, attendance at trade conferences, and the distribution of promotional kits containing brochures that diagram meeting spaces, promote the amenities in individual rooms, and highlight nearby transportation and dining options.

OPERATIONS AND MAINTENANCE

In addition to asset enchancement, another objective of Ruffin's real estate transactions is cash flow. To preserve the asset value and generate cash flow, Ruffin Properties owns and operates all of its properties in house. This is no simple task given that Ruffin Properties owns over 4,000,000 square feet of single-use buildings, offices, industrial parks, and warehouses in Wichita (Kansas) and Tulsa, as well as hotels around the country. Tenants span the entire spectrum and include large retailers, financial institutions, and government.

EXPERIENCE GAINED

The Kensington Business Centre's success is due in large part to the shift from an emphasis on individual employee office space to shared spaces and to the abandonment of interior walls and traditional offices in favor of modular furniture.Success is quickly imitated. The "retail-turned-office" model of the Kensington Business Centre has gained followers in downtown Tulsa at the Williams Center Forum, another upscale retail mall built in the late 1970s. The Williams Center Forum, whose primary occupant will be the Williams Companies, is re-creating the large floorplates that characterize the Kensington Business Centre.An element critical to the success of the Kensington Business Centre is an infrastructure already in place before the conversion to office use. If the infrastructure had to be developed, its cost may have exceeded that needed to justify the project.With a good market analysis and some significant preleasing by high-quality credit tenants, a former mall can be successfully transformed into high-tech office space. Ruffin Properties spent over a year evaluating alternative retail leasing plans for the mall. In the end, all indications pointed the need for more office space in Tulsa to meet the demands of the several corporations locating there to take advantage of the city's sophisticated high-tech infrastructure. Being approached by a high-quality credit anchor tenant for the proposed office space removes a lot of the risk from an office project.Fostering and maintaining a good relationship with tenants is of paramount importance to a successful office project. Ruffin Properties' management staff is located in the office tower of the Kensington Business Centre. Thus, management is always accessible to the tenants of the office park and able to respond quickly to tenant needs.

PROJECT DATA

LAND USE INFORMATION

Total Site Area: 40 acres

Gross Building Area (GBA) Phase IRetail space converted to office space: 270,000 square feetOffice tower: 183,000 square feetHotel: 310,000 square feetLinear shopping center: 51,000 square feet

Gross Leasable Area (GLA)Retail space converted to office space: 236,000 square feetOffice tower: 164,000 square feet

Floor/Area Ratio (FAR): 0.601

ParkingSurface: 2,200 spacesStructured: 0 spaces

1FAR equals the sum of GBA for Phase I and GBA for Phase II divided by total site area.

LAND USE PLAN

Use Acres Percent of site

Hotel 1.45 3.63

Office 6.57 16.42

Linear center 1.17 2.92

Parking/circulation 26.56 66.40

Open space/landscaping 4.25 10.63

Total 40.00 100.00

RATES BEFORE AND AFTER RENOVATION

Before December 1991 Current

Occupancy Rate

Office building 82.0% 98.5%

Galleria mall (including anchor space) 45.0% 100.0%

Hotel 48.0% 65.0%

Linear shopping center 91.0% 95.0%

Average Rate

Office building (gross, per square foot) $9.21 $10.68

Galleria (gross, per square foot) $1.75 $9.70

Hotel (per night) $69.99 $109.99

Major Tenants

Office buildingDyco Petroleum Unit Corporation

Callidus Technology Unit Corporation

Galleria Dillard's United Video Satellite Group

Linear shopping center Sipe's Food Stores Office Depot

RENOVATION EXPENSES

Former GalleriaMall less Dillard's(United Video)

Former Dillard's

(MicroAge) (Tulsa National Bank)

Construction

Superstructure $760,500 $210,233

HVAC $385,000 $73,825

Electrical $875,000 $273,625

Plumbing/sprinklers $365,000 $59,786

Elevators $50,000

Fees/general conditions $1,480,000 $21,142

Finishes $803,600 $361,500

Graphics/specialties $54,718 $21,848Other $3,000 $13,434

Total $4,726,818 $1,085,393 $746,137

Soft Costs

Architecture $115,000 $3,500

Project management $70,000 $54,270

Leasing/marketing $450,000 $100,000 $75,000

Taxes/insurance $100,000 $48,000 $37,000

Other $3,000 $3,111

Total $738,000 $208,881 $112,000

Total $5,464,818 $1,294,274 $858,137

Former Sheraton (Southern Hills Marriott)

Lobby $158,600

Rooms/kitchen $2,034,000

Public areas $207,900

Meeting rooms $321,600

Infrastructure $140,000

Total $2,862,100

Total Renovation Expenses (Hotel, Galleria Mall, and Anchor Tenant): $10,479,329Purchase Price: $12,000,000Total Project Cost: $22,479,329

DEVELOPMENT SCHEDULE

Purchased: December 1991Hotel Renovations Started: August 1993Buildout for United Video Started: December 1993United Video Occupancy: December 1993Tulsa National Bank Occupancy: February 1994MicroAge Occupancy: October 1994

DIRECTIONS

From Tulsa International Airport: Take I-244 to I-75 south to 71st Street exit. Continue two miles east. The project is on the right.

Driving Time: Approximately 10 minutes in nonpeak traffic.

Mary B. Schwartz, Report AuthorMary B. Schwartz, Editor, Online Project Reference FileEileen Hughes, Managing Editor

This Development Case Study is intended as a resource for subscribers in improving the quality of future projects. Data contained herein were made available by the project's development team and constitute a report on, not an endorsement of, the project by ULI-the Urban Land Institute.

Copyright © 1997 by ULI-the Urban Land Institute1025 Thomas Jefferson Street, N.W. Suite 500 West, Washington D.C. 20007-5201

An aerial view taken from the south of the former Kensington Galleria, now the Kensington Business Centre. DowntownTulsa, located almost due north of the Galleria, can be seen in the background.

A sign announces the southeast entrance to the former upscale retail mall, Kensington Galleria.

An architectural space frame and United Video Satellite Group sign announces the southeast entrance to United Video's headquarters in the Kensington Business Centre.

An escalator was replaced by stairs between the first and second floors of United Video. On the lower level can be seenthe modular workstations of the employees of Super Star, a subsidiary of United Video, which provides video

programming to satellite dish owners and dealers.

Sunlight pours in through the skylights, illuminating the first and second floors of the former Kensington Galleria.Sakowitz, the anchor tenant, can be seen at the back of the photo.

The openness of the office design is nowhere more apparent than in what used to be the atrium to the Kensington Galleria and is now an atrium for United Video.

What used to be a store at a corner location on the second floor has been converted to a conference room, complete withItalian marble tables and state-of-the-art video equipment.

Retail stores turned broadcast rooms are common throughout Kensington Business Centre.

The north entrance to the mall has become the main entrance for United Video. What used to be a waterfall (at left ofphoto) has been transformed to a display of color televisions showcasing the company's products and services.

The Kensington Galleria Site plan.

Southern Hills Marriott Site plan.