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Adaptive Reuse Pioneers Testing Investor Demand In Atlanta

Atlanta's pioneering adaptive reuse and creative office developers have put for-sale signs on their properties, and experts are bullish that investors will be willing to pay prices similar to what conventional office buildings and strong retail centers have been fetching in recent months.

Ellsworth creative office adaptive reuse project in West Midtown

Paces Properties and Stream Realty are the latest to place their projects on the market, including Midtown food hall Krog Street Market.

“I think it will have good demand from investors, and I think they'll get cap rates that are similar to Class-A office space,” Bull Realty CEO Michael Bull said.

Creative office and urban adaptive reuse projects — when developers turn, say, an old warehouse project into a mixed-use retail and office destination — are becoming more widely accepted by corporate America. That is turning the heads of investors with deeper pockets, including institutional investors, Bull said.

“There's demand from tenants, so they feel comfortable with the product,” he said.

Krog Street Market in Inman Park

Paces Properties has both its banner food hall concept, Krog Street Market, and its creative office/retail sister property, Stove Works, on the market with Eastdil Secured for an undisclosed sum. Paces purchased Stove Works and the buildings off Edgewood Avenue and Krog Street in Inman Park that, at the time, were being used by movie producer and director Tyler Perry as studio space in 2012.

Paces turned those studio buildings, which originally began life in the late 1800s as a potbelly stove factory, into Krog Street Market.

Krog Street is home to a variety of eateries and retailers, including Fred's Meat & Bread, Gu's Dumplings and Ticonderoga Club. Stove Works also is home to celebrated Atlanta chef Kevin Rathbun's steakhouse, Rathbun's, as well as the offices of the Atlanta BeltLine Inc., Moser Law Co., Media Star Promotions and the nonprofit Trees Atlanta.

Stream Realty also tapped Eastdil to market its 92K SF adaptive reuse Ellsworth project in West Midtown for an undisclosed sum. Ellsworth made headlines last year when Atlanta-based sports shoe apparel retailer The Athlete's Foot announced it was moving its headquarters from suburban Cobb County to the project. All three projects are along the BeltLine.

Despite the properties' differences compared to traditional Class-A office buildings and strip centers that dominate Atlanta's skyline and roads, they will likely fetch similar prices, Eastdil Managing Director Mike McDonald said.

“We got a lot of capital in the creative office space right now. They get creative office, understand it,” McDonald said. “I think also a lot of folks have an allocation for office in their portfolio now … [with an] allocation for creative office.”

McDonald said he expects a buyer to be selected by the end of October for Ellsworth and by mid-November for the Paces Properties portfolio.

The Paces Properties portfolio and Ellsworth are the latest adaptive reuse projects to hit the market.

As Bisnow first reported, Third & Urban put its Armour Yards project on the market, also with Eastdil. The 300K SF redevelopment of a collection of former warehouses sits near the Interstate 85 interchange at Piedmont Road. Officials expect Armour Yards could fetch as much as $350/SF from potential investors.

That is well above the average price-per-SF for Class-A office right now in Atlanta. According to Marcus & Millichap, the average price has reached $147/SF, with medical office buildings averaging around $180/SF.

Third & Urban Partner Chris Faussemagne at a 2017 Bisnow event.

Panelists at Bisnow's recent TOD & Adaptive Reuse event touched on the mainstream investor acceptance these projects. Third & Urban co-founder Hank Farmer said Jamestown Properties' success with Ponce City Market brought the adaptive reuse niche in Atlanta to the attention of national investors. That helped the group land capital for Armour Yards.

“[We] talked to J.P. Morgan, who ended up being our partner,” Farmer said. "And we didn't have to explain creative office [to them]."

It also helps that larger tenants with better credit are demanding a presence in creative office projects, Westbridge Partners principal Chris Faussemagne said.

“Ten years ago, I don't think adaptive reuse was making a list for those tenants,” Faussemagne said. “At this point, we definitely entered the phase of being mainstream.”