Transwestern: Creative Office Projects Grow, Could Generate ‘Staggering’ Returns

While “creative” office conversions to modern open workspaces are nothing new, the increasing volume of creative office exits nationally at core and core-plus pricing is noteworthy, reported Transwestern, Houston.

“Based on staggering exit pricing of some major creative office projects around the country, this type of value-add strategy–on this large scale–is now being considered by many local, regional and national developers, either via direct investment or joint-venture partnerships with equity partners,” said Transwestern Research Director Michael Soto. He co-authored the firm’s Creative Office Report with Transwestern Research Director Sandy McDonald.

Soto said two trends fuel demand for this type of office product. “First, technology, advertising, media and other companies trying to attract millennials [as employees] are interested in the characteristic features of creative office space–open floor plans, natural lighting, common spaces and amenities such as cafés and rec rooms. And second, tenants are returning to cities, where they can take advantage of live/work/play environments.”

Soto and McDonald examined properties including 1000 W. Fulton Street in Chicago. “This former Fulton Market cold storage warehouse was renovated to creative office space and leased to Google for the company’s Midwest headquarters,” the report said. Other tenants include bicycle component manufacturer SRAM International and advertising agency Sandbox. In Austin, Texas, a decommissioned power plant at 800 Cesar Chavez Street was converted to a mixed-use project with 153,000 square feet of creative office and 56,000 square feet of retail and restaurant space. “Approximately 112,000 square feet is leased to Athenahealth Inc., while the retail space is anchored by Trader Joe’s and Under Armour,” the report said.

Many national and international institutional buyers will pay traditional trophy Class A pricing for stabilized creative office properties, usually based on the tenant’s creditworthiness and the project’s location, Transwestern said.
But McDonald cautioned that many existing creative office projects were acquired and developed under very different economic conditions than exist today.

“Rising land, building and construction costs–especially in hot neighborhoods–may add more risk when compared to a few years ago, when we were at a different point in the real estate cycle,” McDonald said. “In addition, adaptive reuse often comes with hidden costs and potentially expensive future property modifications.”

Moreover, creative office space’s popularity means that there is more inventory in the market today than just a few years ago, McDonald said. “Landlords that own existing office buildings or are doing ground-up development are realizing that they must consider strategic property enhancements and creative office-associated tenant amenities to stay competitive in the marketplace.”