Why Creative Office Is Really A Game Changer

Office has always been the most capital-intensive asset class. When leases roll, office landlords spend as much as $30 per square foot to renovate the property for a new tenant. However, the popularity of creative office is changing all of that. Upkeep in between tenants for creative spaces is as low as $10 per square foot. That makes the office asset class much less capital intensive, and investors are taking notice. To find out more, we sat down with Andrew J. White, managing director of the Western Region at Gladstone Cos. Here, he tells us why creative office is a game changer for landlords, all about re-tenanting costs and why creative office is here to stay.

GlobeSt.com: How has creative office changed re-leasing costs for office landlords?

Andrew White: Industrial and multifamily are so hot right now. The benefit of those asset classes is that when a tenant moves out, you only have to clean the carpets or sweep the floors and paint the walls, and that doesn't cost you more than a few bucks a square foot. In office, historically, you would have to spend $25 or $30 per square foot every time a tenant moves out. Landlords have often struggled with how to make that work. Every five years, it costs a lot of money. For that reason, a lot of investors have preferred industrial and multifamily over office. Now, creative office is reducing those costs. When a tenant moves out of a creative space with polished concrete floors, open floor plan, open ceilings with open ductwork and some drop down pendant lighting, the tenant improvements are similar to an industrial or multifamily property in that you only need to clean the floors, repaint, and maybe move some lighting. It is kind of a game changer for office because it makes it less capital intensive.

GlobeSt.com: What is the difference in re-leasing costs for creative office?

White: The first time that you go from traditional office to creative office, it will cost $50 per square foot, because you are essentially ripping out all of the old offices and the ceiling to create open spaces, and you are doing a lot of renovations and improvements. That is expensive, but if that tenant moves out in five to seven years, the property will require much less work for the next tenant. Second generation on these offices is more like $10 per square foot, which isn't very bad. Now, creative office looks really attractive.

GlobeSt.com: Could this be true for office conversions in both the suburbs and the CBD?

White: Historically, all office was built out with perimeter offices, and that would take up window space. That was the way that offices were built in both the CBD and the suburbs. The creative office conversion factor applies to both of these markets, now. It is a matter of taking a traditional office building and making the same renovations, like opening up the space, the ceilings, bringing in natural light, polishing the floors, adding pendant lighting, activating the common areas to create a sense of community, offering health and wellness areas like fitness centers and indoor/outdoor work space with Wi-Fi and so on. It is an expensive cost up front, but the second-generation cost will be less. I think the reduced second-generation costs will make office more attractive for investors.

GlobeSt.com: Is it worth making the renovations? Is creative office here for the long term?

White: The creative office trend is here to stay. Millennials want the open spaces and collaborative space described above. They want to work in a nice environment and feel like they are part of a bigger work community than just being isolated in a cubicle or office, and they would rather have this holistic workplace and take less money than be stuck in a traditional isolated workspace with no amenities. They value quality of life, and they believe in a holistic view of life where there is a good balance and where the office is an extension of your home. Millennials want that, and it is going to stay that way.

GlobeSt.com: Do creative office properties command higher rents?

White: Yes, you are going to get a premium in rent. Companies have gone to the CBD to provide a live-work-play environment to employees. Suburban office can also provide this environment if it has restaurants, hotels, entertainment, residential opportunities and public transportation. Suburban office can even provide more amenities than the CBD with more outdoor workspace, jogging and bike trails and lower cost housing. Companies have been spending up on rent to find spaces that will attract millennial talent. Companies are using the office as another perk. If the office doesn't have the amenities that millennials want, then they aren't going to work there. If the landlord can provide an attractive creative workspace with all the amenities, for a 20% rental premium, tenants will pay for it. Then, the second time around, landlords are still going to get higher rents, but there is going to be less cost to re-lease the space.