Alternative asset classes and tertiary markets are attracting significant investment.
THE NEARLY 250 attendees at NAIOP’s inaugural O.CON: The Office Conference, held in Houston on June 24 and 25, learned that demographic shifts, evolving technology and changes in the very nature of work are revolutionizing office real estate, resulting in dramatic changes in how, where and what type of office space is being developed and redeveloped. Speakers introduced some of the high-tech tools and systems that are improving communication and productivity in today’s office buildings; explored trends and opportunities in alternative asset classes; discussed the current situation and outlook for future demand in core, secondary and tertiary U.S. office markets; and more.
Many attendees also joined one of three pre-conference tours: a visit to a 500,000-square-foot former Nabisco cookie factory that Texas Medical Center has transformed into office and lab space housing auxiliary health care services as well as new incubator and accelerator programs; a hard hat tour of the historic Texaco headquarters building, which is in the process of being converted to luxury multifamily residences; and a look at several buildings in the modern, 1.6 million-square-foot Energy Center campus being developed by Trammell Crow Co. in Houston’s bustling energy corridor.
Old Industrial Buildings Make Great Creative Office Space. Panelists presented several examples. Bill Katter, executive vice president, United Properties, described two former industrial properties in Minneapolis. His firm used historic tax credits to transform both the Ford Center and the Loose Wiles Biscuit Factory building into cutting-edge creative workplaces that retain much of the structures’ original industrial character, including conference rooms located in former bakery ovens. Mark Hansen, senior vice president, value-added investments, Prologis, described the conversion of a 202,000-square-foot building on a site containing an operating paper mill in the heart of Silicon Valley. The building has become a flexible corporate headquarters and furniture showroom for One Workplace, Northern California’s largest commercial office furniture dealership.
The Ways People Work and Use Office Space Have Changed and Continue to Evolve. As the millennial generation becomes the largest in the workforce — having recently surpassed Generation X and the baby boomers — large corporate users, small startups and everyone in between are looking for a host of new office space features. These include improved mobile phone coverage, because 80 percent of mobile traffic now originates indoors, according to Bill “Shoes” Delgrego, executive director of ExteNet Systems, which provides distributed antenna system (DAS) networks that improve cellular coverage.
Today’s spec projects look very different from those built during the last development cycle. Three panelists, all of whom have spec projects underway in North Dallas, currently one of the most active development markets in the U.S., discussed the importance of choosing the best sites in areas where they believe job growth will continue, as well as the best teams, partners and capital sources. They also described how important it is to build projects with the up-to-date features that end users now want, such as:
- Column-free corners and floor-to-ceiling glass that give more workers access to daylight.
- Attractive, open staircases that encourage employees to walk between floors rather than take elevators.
- More private bathroom stalls (desired by a more multicultural workforce).
- Access to transit and other alternative forms of transportation.
- Flexible workspaces with demountable partitions that can be quickly and easily moved.
- Flexible gathering spaces (both indoors and outdoors) with kitchen facilities and comfortable seating.
Greg Fuller, chief operating officer, Granite Properties Inc., pointed out that because prospective tenants have so many options, developers “have to go speculative, and you have to be smart about it. Lately, the winners have been the most amenitized locations.”
CRE Has Fallen Behind Other Industries in Use of Technology. But that is changing. New, rapidly evolving high-tech tools and systems can help office developers and investors, as well as building owners and operators, collect and analyze vast amounts of data, meet tenants’ needs, and ensure that their properties remain competitive. Brandon Weber is founder and CEO of Hightower, a streamlined platform designed to give CRE professionals access to global portfolios from their cell phones and tablets. He pointed out that introducing new technology into an industry where most business is still conducted with Microsoft Word documents and Excel spreadsheets is a big shift, but said that Hightower has gained followers because it is automating the most mundane aspects of the business. The “Uberization” of the CRE business also is bringing transparency to a formerly opaque market, noted David Eisenberg, founder and CEO of Floored, Inc., which develops virtual reality software and 3-D modeling systems for CRE, including “leasing presentations of the future.”
O.CON ‘15 attendees network at a reception hosted by NAIOP Houston and Stream Realty Partners on the 10th floor of the new BBVA Compass Plaza building.
Suburban Office Space Is Becoming More Urban. While yesterday’s suburban office workers were content to drive from their offices to everywhere else, today’s workers want to be able to bike, take transit or walk to as many places as possible. But this doesn’t mean that they all want to move downtown. According to Dirk Mosis III, executive managing director, USAA Real Estate Co., suburban office environments are densifying and becoming more urban to attract and retain workers. New office projects are being developed close to (or in conjunction with) multifamily housing, transit and restaurants, and increasingly include a wide range of amenities like conference centers, gyms, cafes, lounges and more.
Alternative Asset Classes Offer New Opportunities. A superheated office investment climate has resulted in strong investment in medical office buildings, data centers and life sciences facilities. All three of these property classes represent significant opportunities for office investors, owners and developers looking to diversify.
Clete Casper, director of real estate, Sabey Corp., noted that demand for data centers is exploding, the projects are very complicated and expensive to develop, and leases are long (10 to 15 years) and “sticky”; it is unusual for tenants to leave. He also addressed development and investment opportunities in the life sciences industry, adding that this sector, too, is “growing by leaps and bounds,” and that although laboratories are more expensive to develop than office space, rents are significantly higher and facilities lease up and appreciate more quickly. Davis Griffin, principal, Trammell Crow Co., noted that 25 percent of all healthcare systems plan new medical office buildings within the next three years, creating significant opportunities for savvy developers who understand and can meet the needs of hospitals and physicians.
Capital Is Moving Beyond Gateway Cities to Chase Yield. “There’s plenty of capital producing liquidity in secondary and even tertiary markets,” as well as in suburbs, commented Al Pontius, national director, commercial property groups, Marcus & Millichap. He pointed out that, looking beyond large transactions involving trophy properties, 77 percent of the properties that sold for between $10 million and $25 million were in suburban locations. “That’s one metric that really points to the expansion of where office capital is aimed,” Pontius said. He added that “tertiary [markets] trump the majors by a very, very, very wide margin,” in terms of the number of transactions taking place.