Creative office space has continued to move from a trendy niche to a formidable segment of the office market for both tenants and investors. A new report released by commercial real estate services firm Transwestern shows that creative office projects across the country have been generating “staggering” returns for investors, thanks in large part to growing appetite for the product type from institutional buyers.
The genesis of this research project started with the 2016 sale of Google’s Midwest headquarters in the River West area of Chicago. Developer Sterling Bay Company bought the former cold storage warehouse in 2012 for $12 million, renovated and leased it to the tech giant, and then sold it last summer for $303.6 million, according to Transwestern.
That price exceeded a lot of the pricing metrics and valuations that most watchers in the Midwest thought was possible, notes Michael Soto, research manager, Southern California, at Transwestern.
“We started connecting the dots and seeing that this type of strategy was happening all over the country and some well-positioned, well-timed projects were starting to make their sale exits,” says Soto. And many of those sales were commanding prices on par or even higher than trophy class-A office towers.
The tech industry was one of the first to locate in creative office spaces. However, the pool of tenants interested in that type of space is proving to be much broader and deeper, which in turn is driving demand and sending rental rates and properties values soaring. “These types of stabilized creative office projects are on the radar of a lot of institutional investors now who are looking to place money in core and core-plus properties,” Soto notes.
Some people view creative office as the “office of the future” and a key ingredient in employee retention and recruitment, says Josh Simon, a managing director in the Denver office of capital services provider HFF. Investors are taking note of the tenancy that these buildings are attracting, as well as the returns they are generating. “What we’re seeing in Denver is that creative office is in high demand and we’re seeing demand expand in the institutional space,” Simon adds.
Adaptive re-use of former industrial and retail properties has continued in both urban and suburban areas. “We are starting to see this adaptive re-use strategy on a much, much larger level,” says Soto. A growing field of buyers that includes pension and private equity funds, life insurance companies and foreign funds will likely add even more fuel to that fire. That being said, investors are still being very selective about location and credit quality of the tenants, Soto notes.
The Transwestern report highlights the sale of creative office projects in major metros including Boston, Chicago, Los Angeles, New York, Phoenix, San Francisco and Austin, Texas. The five properties that have commanded the highest price per sq. ft. include: