Building New Cities With Old Bones
Winston Churchill said, “We shape our buildings, and afterwards our buildings shape us.” And while there are many developers working hard to erect the office buildings of the future, others are just as passionate about repurposing yesterday’s buildings for modern-day use, believing that the character of these structures is still viable.
R2 Cos. chief investment officer Max Meyers said that while there is plenty of new construction that is attractive, it cannot compete with existing product from a design perspective. R2 looks for buildings with what Meyers calls “true character” so that when these assets are repositioned, it results in a product that cannot be replicated with new construction. Adapting these buildings also provide significant cost savings that can be passed along to tenants.
R2 and Walton Street paid $86M last November for a portfolio of seven buildings and three land sites in the West Loop and South Loop. Six of the seven buildings in the portfolio range between 53K SF and 85K SF; the largest, 641 West Lake St., is 107K SF. Meyers said design elements such as exposed timber and brick and terra cotta façades are attractive selling points to a different type of tenants than the ones being courted for newer Class-A construction office buildings. The smaller footprints in these buildings cater best to midsize tenants.
R2 seeks properties in markets where the surrounding neighborhoods can serve as an amenity. The West Loop’s status as a booming restaurant and nightlife district is a selling point to many companies. R2’s developments on Goose Island are also using the surrounding neighborhood as an amenity. Goose Island is almost equidistant from the central business district and neighborhoods like Wicker Park, Bucktown and Logan Square where downtown office workers live. That cuts down on commuting time, which can be transferred to productivity during the workday.
R2’s Goose Island developments offer prospective tenants a significantly lower economic proposition for a larger footprint, and a more unique building experience. Meyers is excited that the Plan Commission approved the North Branch Industrial Corridor Framework last week, as proposed zoning changes will finally expedite activity on and around Goose Island, which Meyers believes should be more developed than it already is.
R2 has executed a couple of high-profile covered land plays in the past 18 months. These deals provide a steady revenue stream for R2 on the properties while the firm can plot out its next moves. R2 JV’d with Polsky Holdings in October 2015 to buy the downtown Milwaukee post office in a $13M deal. The USPS’ lease runs through 2020, with a series of five-year extensions. But it is considering relocating to other areas to meet the needs of customers.
R2 is working with Gensler to draft a mixed-use reuse plan that highlights the 50-year-old building’s Brutalist architecture. The post office ties in with Milwaukee’s ongoing efforts to revitalize West St. Paul Avenue, which includes installing a streetcar system that Meyers said would drop workers off at the building’s front door. The building is also near Milwaukee’s Amtrak station, making any future retail in the building ideally located for tourists.
R2 and Polsky also bought the WGN television studios at 2501 West Bradley Place in a $22.25M sale-leaseback deal in February. It is another covered land play with a high-credit tenant, in a heavily residential neighborhood. The studios are in the highly rated Bell School District and located a block north from Lane Tech College Prep, one of Illinois’ highest-ranked high schools. Meyers said R2’s deal with WGN is similar to the Milwaukee post office. As long as WGN wants to stay, it can. But if Tribune Media’s new owner, Sinclair Broadcasting, decides to relocate the studio, Meyers said R2 would be happy to have the site as a redevelopment play.
To hear more from Meyers and other office real estate experts, attend Bisnow's Big Midwest Office Event, 7 a.m. on June 14 at 440 South LaSalle. Register here.