With Adaptive Reuse, A Straight Office Play May Not Be The Best Repositioning
While creative office is popular in adaptive reuse, it not guaranteed to grab tenants. A repositioning's chances of success is better, and lease-up faster, if office is working with a complementary asset class like retail.
“While the physical nature of an adaptive use asset helps determine its best use, ultimately we make investment decisions based on supply and demand. How do we bring a product to the market that is unique, cost-effective and compelling for tenants?” Garrison said.
R2 controls 500K SF of buildings on 10 acres in Goose Island: a three-acre former boat yard at 934 North Branch, a 300K SF concrete loft building at 1001 North Branch, a 53K SF building on three acres at 1200 North Branch and a 140K SF building at 1315 North Branch. All of these buildings were acquired under sale-leaseback agreements that expired in mid-2017.
Garrison said R2 envisioned creative office as a use on Goose Island when it made these deals, and there was precedent. Tech office has always been a use in planned manufacturing districts, with Wrigley and Mars relocating to Goose Island as the precedent. Garrison believed the market would eventually come to Goose Island.
But Goose Island was missing the other necessary factors to make a dynamic office market: retail amenities, green space along the Chicago River and building infrastructure and connections to the surrounding neighborhoods.
The relaxed zoning changes approved under the North Branch Industrial Framework now allow R2 and other developers to unlock Goose Island's true mixed-use potential, which serves the creative office at the core of R2's repositioning strategy.
R2’s first Goose Island project, 1200 North Branch, is completely leased, with construction expected to be completed in March. Garrison said the tenancy is a mix of office and retail signed to five- to 10-year lease terms, with a coffee shop going in on the corner — the first coffee shop on Goose Island. Garrison said the fast lease-up shows the strength of demand for space on Goose Island, and the submarket’s best selling points are proximity to downtown and north side neighborhoods, great economics, interesting buildings in riverfront locations and ample amounts of parking and open space.
“This will be a campus environment within the city,” Garrison said.
R2 Cos. will begin work repositioning 1315 North Branch in January and will deliver the building in Q3 2018, and Garrison said R2 is in talks with several potential tenants. R2 shut down the boatyard at 934 North Branch last October and is taking the existing 20K SF building and putting in restaurants and shops. The rest of the site will be open space including a riverwalk and parking.
Tucker Development CEO Richard Tucker said he does not want to force any one use into a mixed-use development. But an overview of Tucker's portfolio shows retail is the foundational component. There is a complementary office presence, but it typically fits with the retail programming.
The 200K SF Town Square Wheaton, which Tucker Development bought for $57.2M two years ago, includes 40K SF of office, but it is not the project's driver. Tucker believes medical office uses will provide the asset with additional daytime traffic that will cross over to the property's retail and hospitality components.
For a luxury retail repositioning like 900 West, Tucker Development's 91K SF mixed-use redevelopment in Fulton Market, having a creative office component made perfect sense. Tucker believes Fulton Market's growing status as an office submarket in high demand with tech tenants is an opportunity waiting to be seized upon.
Tucker's project at 900 West is approximately half office, half retail. Tucker Development completed a lease with Regus in September to open a 40K SF Spaces co-working concept at 900 West. Coupled with a smaller tenant on the fourth floor, 900 West's office component is fully leased.
"We believe we have the best-in-class with Regus operating Spaces out of 900 West," Tucker said.
Tucker believes true creative office in future mixed-use projects will be vertical in nature, located on the second floor or higher, and Tucker is looking for more opportunities like 900 West.
To learn more from Tucker and Garrison, attend Bisnow's Next Level Office Projects of the Midwest event Jan. 11.