A new study by commercial real estate firm Transwestern shows that adaptive reuse projects can yield “staggering returns for investors.” Of the creative offices tracked in the research, two are located in Dallas’ West End: The Brewery Building and Factory Six03. The research tracked “noteworthy” creative office developments across the country—those marked as having an exit price over $50 million, or those that are under development with a size of 100,000 square feet or more.
Factory Six03, which is being redeveloped by Granite Properties, spans 215,440 square feet and was formerly home to Brown Cracker & Candy Co., Sunshine Biscuit Factory, and West End Marketplace. The Brewery Building, which is being redeveloped by Provident Realty Advisors, has 180,000 square feet and was built in 1890.
According to the Bureau of Labor Statistics, the number of jobs in the United States that are classified as manufacturing has been declining over the last 20 years—a statement that may not be surprising. In 1996, the number of jobs hovered around 17 million decreasing to around 14 million jobs in 2006, and last year that average hung around the 12 million jobs mark. This leaves a number of former manufacturing buildings readily available for creative office projects, and developers have responded.
“The conversion of a property from industrial or retail use to creative office has become an increasingly popular value-add strategy for investors,” Transwestern’s Michael Soto, director of research in Southern California and co-author of the report, said in a statement. “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.”
While this type of development is nothing new, the research points out, “What is new this cycle is the sheer volume of creative office exits nationally at core/core plus pricing.” Of the significant projects tracked in the research, Texas had the most creative office projects currently under development. In addition to the two in Dallas, the other Texas projects are Houston’s Imperial Market, San Antonio’s Pearl, and Austin’s Saint Elmo Market District.
The authors of the research offer some cautionary advice for entering this kind of development in today’s market. “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,” Sandy McDonald, director of research in Chicago and co-author of the report, said in a statement. “In addition, adaptive reuse often comes with hidden costs and potentially expensive future property modifications.”