Renovate or build new? Transwestern finds large creative office projects generating “staggering” returns

by Brianna Crandall — March 27, 2017 — Of interest to facilities managers and owners who are weighing the benefits of renovations vs. new build, and what types of amenities are currently expected, full-service commercial real estate firm Transwestern recently released a report examining a number of creative office projects that have generated substantial returns for investors upon completion. The adaptive reuse developments span Boston, Chicago, Los Angeles, New York, Phoenix, San Francisco, and Austin, Texas. The report also highlights 20 additional large creative office projects currently underway across the country.

Michael Soto, director of Research in Southern California and co-author of the report, explains that while creative office conversions are not new, what is different this cycle is the sheer volume of creative office exits nationally at core/core-plus pricing that have occurred during the past five years — with the buyers being major institutional investors or well-known owner/users.

Soto stated:

The conversion of a property from industrial or retail use to creative office has become an increasingly popular value-add strategy for investors. Two trends are fueling demand for this type of differentiated office product: One, technology, advertising, media and other companies trying to attract Millennials 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 two, tenants are returning to cities, where they can take advantage of live/work/play environments.

Based on favorable 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 developers, either via direct investment or joint-venture partnerships with equity partners. Conversely, stabilized creative office properties are on the radar of many national and international institutional buyers that are paying traditional trophy Class A pricing for these types of properties, usually based on the credit-worthiness of the tenant, as well as the location of the project.

The report cautions, however, that many of these projects were acquired and developed under very different economic conditions than exist today.

Sandy McDonald, director of Research in Chicago and co-author of the report, pointed out:

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. In addition, adaptive reuse often comes with hidden costs and potentially expensive future property modifications.

Moreover, the popularity of the creative office concept means that there is more inventory in the market today. 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.

To view the complete report, titled Creative Office Projects: Adaptive Reuse Generates Staggering Returns for Investors, visit the Transwestern Web site.