It’s no secret that the office sector continues to struggle. Companies are downsizing their office space as more of their employees work at least part-time from home. Older office buildings are struggling to attract tenants, many of whom are now renting a smaller amount of higher-quality space.
And a growing number of owners are considering converting their underperforming office properties into multifamily space, an option that only works for a select few buildings.
This doesn’t mean that there aren’t opportunities in the office sector today. Just ask Redline Property Partners, an investment, management and development firm with offices in Minneapolis and Charlotte, North Carolina.
Redline Property Partners is seeing plenty of success with its office projects, operating several in Minnesota and the Carolinas that boast low vacancy rates and quality tenants.
What’s the secret formula? Andrew Webb, managing principal of Redline, points to hard work: Redline spends countless hours on selecting the right office properties in the right locations. The company also improves the properties it owns, transforming what might be outdated office spaces into modern, amenity-rich spaces, the kind of office space that is outperforming its competitors today.
We spoke with Webb about what it takes to succeed in the office market today. Here is some of what he had to say.
A winning strategy
The investment strategy on which we are founded plays a big part in our success. When we started in the office space in 2017, we believed that we were going to see a shift in office-space-using tenants moving from urban areas to urbanized suburban areas, walkable suburban areas that have plenty of restaurants, shops and entertainment options that you can walk to.
Our portfolio is in Minneapolis and the Carolinas. We focus on well-located properties that serve that walkable multi-use suburban area. We find buildings in those locations that are currently underperforming that we can convert to best accommodate the needs of today’s tenants.
The evolving office space
It was true pre-COVID but is even truer now: The office is not a space in which you need to sit in a cube, answer emails and go home. The office space should help companies mentor, recruit and retain employees and it should foster collaboration.
It’s not just the four walls that you rent. When we renovate or build an office project, we are equally focused on the common-area spaces that we are providing, not just the leasable office spaces.
We focus on unique amenities that can be attractive to new tenants. We might not decide to go with a traditional fitness center. Maybe instead we’ll offer a Peloton studio tied into a bike-share program. We also try to bring as much outdoor space programming as we can. We want to build an entire structure that can allow people to meet and collaborate in different parts of the building, not just in their own individual office spaces.
The power of self-management
We also self-manage our properties. For us, the tenant experience is so important. It is the whole ballgame. Just as important as the building itself is how the tenants enjoy their time in the building. That starts with how we form a relationship with our tenants. We think of our tenants as our business partners. It’s hard to execute that strategy when you outsource it to others. We’ve found that self-managing gives us the best opportunity to deliver the best tenant experience.
The demand for urbanized suburban
The biggest positive that comes with working in an urban environment is the fact that office workers can walk to restaurants and shops. But that walkability comes with other challenges associated with working in an urban environment. You have to deal with parking. There’s the commute into the city.
But with urbanized suburban locations, you can recreate 17-hour cities in small suburban areas. The reason we thought that these locations were going to be a high-growth spot was mainly because of Millennials. They are no longer all single and living downtown. They have families. They are moving to the suburbs for schools and to get more living space as the size of their families increases.
We believe that suburban areas are going to be the benefactor of most population growth in the next 10 years. And we are always looking for projects that are in the way of that natural growth pattern.
There are some property types that work well with office buildings in these urbanized suburban locations. Retail is the obvious one. Experience-based retail or eatertainment uses are an especially good fit. Workers can walk to food and beverage options and enjoy some entertainment, too. The other asset we like to have adjacent to our office buildings is a hotel with limited or full-service food options. The hotel provides additional amenities such as food and conference rooms. Hotels, then, are a good complement to office space.
A good example of one of our projects in an urbanized suburban area is International Plaza in Bloomington. We purchased this project back in 2006, before Redline even existed. We bought it at 82% occupied and took it up to 96% before the 2008 downturn. We then gave the property a full renovation and in 2012 brought the occupancy rates back up. Today we are at all-time high rents. There are food options in the building. There is food adjacent to the building. We have hotels on either side of the building. The whole area is walkable. And you are only one light-rail stop away from Mall of America. It has everything. It’s an urban feel in the suburbs.
Not just a flight to quality space .. a flight to a quality experience, too
We are seeing a flight to quality in the office market. But that’s not the full sentence. The word left out is “experience.” We are seeing a flight to a quality experience. It’s not necessarily that tenants are seeking the most expensive or newest office buildings. They are also looking for an office building that provides them with the best experience.
We are also seeing tenants looking for smaller office footprints. Most of our office tenants are looking at office spaces that are under 10,000 square feet. We only focus on buildings that cater to smaller-footprint clients. If you look at any of our buildings, the largest tenant might only be taking 20,000 to 25,000 square feet while the rest are taking under 10,000 square feet. The growth in the office sector is coming from companies looking for under 10,000 square feet of space.
A stable interest-rate environment is a positive for the office sector
When interest rates reduce, that is a good thing. The better thing, though, is having a definitive answer on what interest rates will do. If you look at where lending rates have been historically, we are still lower than where we were in 2008. We are much higher than where we have been in the last 10 years. Some people in our business haven’t seen this before. In the bigger picture, though, we are not in a bad spot with interest rates. The problem is that they were increased too quickly, and we had no definitive answer to when the Fed was going to stop raising its rate. The impact of knowing that interest rates have now settled is probably more valuable than what the actual interest rate is.
The path of growth
When we are looking at properties to acquire, we like to find locations in the path of growth. We typically buy distressed assets that are underperforming. We look for some dislocation between how the property is performing now and how the rest of the submarket is performing. Can we make a meaningful change to the property to capture tenants? If we can’t improve something, we’re not interested in buying it.