As more multifamily developers experiment with modular construction, its use is increasing.
Multifamily developers may finally be about to embrace modular construction.
“Something of a perfect storm may be forming that changes the equation for modular construction,” says Rick Haughey, vice president of industry technology initiatives for the National Multifamily Housing Council (NMHC).
For years, modular construction has only been used to build a fraction of the apartments buildings rising in the U.S.—despite frequent testimonials about the time and money that developers can potentially save by going modular. However, as more developers experiment with modular construction, the pace is picking up. In addition, labor costs have risen as the availability of tradespeople has declined, creating expenses and difficulties for the traditional on-site building process.
Apartments built in factories
Modular construction refers to construction in which large pieces of a building are created at a factory and are transported to the development site on the back of a truck where the pieces, or modules, are lifted into place, usually with a crane. Modular construction experts says that the technique can dramatically shorten the time it takes to create a building, reducing the cost of financing the project. Faster construction also reduces the risk that a building will come on the market that has become weaker since construction started.
Modular construction was used to build 3.02 percent of “commercial housing,” a similar category to “multifamily housing,” built in 2016, according to the Modular Building Institute (MBI), based in Charlottesville, Va. That’s up significantly from 2.32 percent in 2015.
“We are still looking at the 2017 data, but expect it to increase,” says Tom Hardiman, executive director of MBI. Local officials have expressed an interest in modular construction. For example, the New York City Department of Housing Preservation and Development recently began a formal process that could lead to a large-scale modular program.
So modular construction is growing quickly, but it is still just a fraction of all apartment construction happening today. “While modular construction has seen wide acceptance in other countries, it has struggled to gain mainstream acceptance in the United States,” says NMHC’s Haughey. “Several major apartment developers have experimented with it, with mixed results.”
A number of construction companies now go far beyond just creating the modules in their factories—some also act as the general contractor and even the designer, cutting down of the potential confusion between team members struggling to work with a new method of construction.
“We offer a turn-key solution,” says Roger Krulak, founder of Full Stack Modular, which creates its modules in a factory at the Brooklyn Navy Yard in Brooklyn, N.Y. The firm plans to start four projects in 2018 to build midrise townhouse apartment communities, rising four to five stories high. By 2019, the firm plans to be at its full capacity, producing projects totaling 500,000 sq. ft. of space. FullStack produces modules that are fully-finished pieces of their buildings, complete with interior walls, electrical outlets and plumbing fixtures.
This spring, modular company FINFROCK, based in Apopka, Fla., will earn its last certificate of occupancy for Broadstone Winter Park in Winter Park, Fla., developed by Alliance Residential Co. Construction started in January 2017 on the seven-story, 268-unit apartment complex with 480 parking spaces in a precast garage. The construction process will be completed in just 15 months, significantly less time than conventional construction.
The company creates concrete modules in its factory that are finished on-site. FINROCK can also act as general contractor, engineer and architect for the projects that it works on. The concrete pieces are brought to the job site on trucks and lifted directly into place by a crane. That means that FINROCK’s developments don’t require a large staging area. “We ship directly to the hook, so there is no large laydown area,” says William Finfrock, president of Finfrock.
Some in the sector say they have seen around a 10 percent increase in the price of steel since the tariffs were announced earlier this month.
President Donald Trump’s recently imposed tariffs on foreign steel and aluminum have not yet gone into effect. But they are already affecting deal negotiations, bottom lines and construction pricing in commercial real estate.
Some in the sector say they have seen around a 10 percent increase in the price of steel—a material whose prices have already been rising—since the tariffs were announced earlier this month. The price increase—and the uncertainty over future increases—has caused some to rework and reconsider planned projects.
Paul Rohrer, a real estate partner at the law firm Loeb & Loeb in Los Angeles, has been working on a $300 million, 500,000-sq.-ft. high-rise office building in Los Angeles for nearly a year. The goal had been to build the office for a set price—the firm’s clients tend to be entities like the government that don’t typically work in real estate and seek such contracts to reduce their risk. Now that the firm is working on the underwriting stage for the bond that will finance the project, a contractor has notified Rohrer that the project cannot be built at a fixed price—a “steel tariff contingency” needs to be added.
“The problem is that nobody at this point is really able to underwrite the value of this uncertainty, which causes a distortion in the market and could cause deal flow to slow down until folks figure out what to do,” Rohrer says.
Trump’s imposition of tariffs—10 percent on foreign aluminum and 25 percent on foreign steel—excludes Canada and Mexico, and the president also signaled that Australia might be exempt from the taxes as well. In his proclamation related to steel, Trump said the move was to protect national security. The U.S. is the largest importer of steel in the world.
The domestic steel industry heralded the levies, set to go into effect later this month. Thomas J. Gibson, president and CEO of the American Iron and Steel Institute, an industry group, said in a statement that the tariffs are critical to getting U.S. steel workers back to work and “stemming the tide of unfair foreign imports.”
While Trump backed off on subjecting Canada and Mexico to the tariffs, the price increases are still being translated throughout the construction sector, as the steel industry works to hedge any risks once the tariffs go into effect, says Joe Pecoraro, project executive at Skender, a general contractor in Chicago. “Some of the price increases are speculative, in a way, because construction by nature—you’re always looking six to 12 months ahead,” Pecoraro notes.
The price uncertainty has led one of Skender’s affordable housing developers to notify the firm that if prices continue to rise, the project will have to be delayed—there are no excess funds. “Uncertainty drives people to be very conservative, risk-averse. It is affecting our deals,” Pecoraro says.
Construction pricing has been rising in general, largely because of the shortage of skilled laborers around the country and the economic expansion driving the demand for building. Prices on steel mill products rose 2.3 percent from January to February and 4.8 percent year-over-year, according to the most recent produce price index from the Bureau of Labor Statistics (BLS).
Darcie Lunsford, a senior vice president at Butters Realty and Management, a South Florida-based real estate developer, says the price to construct the same building she is working on today was 25 to 30 percent lower just two years ago. “We’re already seen a tremendous amount of increases,” she says. The tariffs make it even more difficult to estimate construction costs. “It’s obviously something that we’ve been watching from the get-go, and it’s been a concern for me and other commercial real estate leaders down here,” says Lunsford, also president-elect of the board of directors of the South Florida Chapter of NAIOP, a commercial real estate group.
There is recent precedent for fears of price increases stemming from tariffs. Last year, the Trump administration imposed tariffs on Canadian lumber. The price of softwood lumber in February was up 15.6 percent year-over-year, according to the BLS.
There has already been a run-up in multifamily construction pricing because of the lumber tariffs, according to Tim Wang, managing director and head of investment research at Clarion Partners, a New York-based real estate investment firm. And his firm’s suppliers have now hiked steel and aluminum prices by 10 to 20 percent, which the firm estimates will increase development costs by 5 percent to 8 percent. “We are assessing whether the market demand is strong enough to pass on the costs to the new tenants, or we have to simply eat the costs ourselves,” Wang says.
However, while higher costs might not bode well for developers of new projects, they could benefit owners of existing buildings. If a newly constructed building charges even higher rent than it would have pre-tariff, the owner of an existing building—likely taking in much lower rent—can use the situation to hike up rents as well. “It’s going to be great for existing property owners,” Wang says.
Some economists are predicting that the tariffs could trigger an end to economic expansion, particularly if other countries take retaliatory measures against the U.S. and a full-scale trade war ensues. “Inflation pressures are building,” says Anirban Basu, chief economist with Associated Builders and Contractors Inc., an industry advocacy group that has come out against the tariffs. “Should those pressures become too great, interest rates are going to rise meaningfully, and that could put an end to this economic expansion cycle.”
Still, the price increases will likely not cut into the volume of steel needed. In the mid-point of the business cycle, there is still strong demand, says Walter Kemmsies, managing director, economist and chief strategist for JLL’s U.S. ports, airports and global infrastructure group. While everyone may be reworking their calculations, a 10 percent price hike might not make a huge dent in the real estate construction pipeline, particularly on the industrial side. Rather, expectations for rates of returns need to be shaved. “It’s a cost, but you need to look at the revenue, and the revenue side is pretty important now,” he notes.
The REITs have more access to financing than ever before and the percent of rental houses that were occupied in 2017 continued to rise.
The leading single-family rental (SFR) REITS continue to be focused on acquisitions and are even building new houses from the ground up to operate as rental properties. At the same time, the REITs have more access to financing than ever before and the percent of rental houses that were occupied in 2017 continued to rise.
“The past six months have been an exciting time for the single-family rental industry,” says Diane Tomb, executive director of the National Rental Home Council, an advocacy organization for the SFR industry. “In the next six months, we expect to see continued demand for the high-quality rental homes our members provide.”
Invitation Homes absorbs new units
Invitation Homes added 34,670 rental properties to its portfolio last year in a single deal when it merged with Starwood Waypoint Homes, a transaction that closed in November. A spokesperson for the company said the company is now focused on a successful integration.
In addition to the merger, Invitation bought and sold a few hundred houses in the fourth quarter, buying just a few dozen more than it sold. “ We will always consider other opportunities that make sense, but we believe we have a terrific portfolio of homes in strategic markets that meet the needs of our residents,” the company spokesperson says.
At the end of the year, Invitation’s total portfolio added up to 82,570 homes. The REIT acquired 290 homes for $80.5 million, including estimated renovation costs. That works out to a relatively high price of $313,000 per unit. The REIT sold 257 homes for gross proceeds of $57.9 million.
American Homes 4 Rent builds new rentals
American Homes 4 Rent plans to spend $400 million to $600 million in 2018, primarily to build new rental homes. At the end of 2017, the REIT had a portfolio of 46,996 leased rental houses, up 970 for the third quarter of that year.
At the end of 2017, 95.7 percent of those homes were leased, up from 95.2 percent in the third quarter.
“American Homes 4 Rent completed a successful year, generating a 6 percent improvement in annual core NOI after capital expenditures from our comparable same-home pool,” says David Singelyn, company CEO.
More financing available
At the same time, the REITs continue to have access to financing. For example, in February, Invitation Homes closed a $917 million, seven-year mortgage loan with an interest rate that will float 124 basis points over LIBOR. The loan repaid a series of loans that had been set to mature in 2019. Including this loan and other refinancing loans that Invitation Homes received, the REIT will save $9.1 million a year in interest expenses.
Terrell Gates, CEO of Virtus Real Estate Capital, continues to stick to a “cycle-resilient” strategy that zeroes in on seniors housing, medical office and workforce housing.
When discussing core commercial real estate sectors, private equity fund manager Terrell Gates divides them into the “basic food groups”—office, retail, industrial and hospitality.
Nowadays, the biggest investment appetite among those four groups should be for industrial, Gates says, while investors might want to leave hospitality off their plates. As for office and retail, some nibbling might be in order, according to Gates, but probably not a feast.
However, Gates, founder and CEO of Austin, Texas-based Virtus Real Estate Capital, a private equity firm specializing in alternative property investments, isn’t putting any of the “basic food groups” on his menu—food groups that REITs typically gobble up.
Rather, he and his Virtus colleagues continue to stick to a “cycle-resilient” strategy that zeroes in on seniors housing, medical office, workforce housing, self-storage and charter schools.
“The easy money has been made in commercial real estate. The easy money has even been made in our property types, which are still more nascent and still have more opportunity than traditional property types,” Gates says. “We’re no longer in the part of the cycle where you can just sort of put it to work, go long and hope everything works out. We believe you’ve got to dig a little deeper than that.”
To enable it to dig deeper, Virtus last year wrapped up raising $408.5 million in capital—$8.5 million over the $400 million target set in late 2015. Of the total, $308.5 million was earmarked for Virtus Real Estate Capital II LP (VREC II); the remaining $100 million was deposited into a discretionary account. Limited partners include high-net-worth individuals, public pension funds, endowments and foundations.
As of Dec. 31, VREC II had made 13 investments in six states totaling $127.6 million in equity. In all, Virtus has more than $3.2 billion in assets under management.
In a Q&A with NREI, Gates shared his insights about one challenge he believes is being underestimated in the industrial sector, the headwinds facing the hospitality sector, and the reasons why he’s so high on seniors housing and medical office segments.
The Q&A has been edited for length, style and clarity.
NREI: What’s your take on the red-hot industrial sector?
Terrell Gates: Among institutional investors, there is definitely a bias toward industrial investment right now, which will buoy prices. But it’s also leading to a lot of supply, which will increase pretty materially going forward. I don’t think, long term, people fully understand and appreciate some of the downside scenarios and challenges of industrial, and how sensitive it is to the overall economy and consumer sentiment.
A lot of people say, “Well, look what Amazon’s doing. This may be the first trillion-dollar-cap company. You’ve got this whole need for logistics and warehouses, and you’ve got to be local.” Yes, that is supportive of industrial. But there’s a lot of existing industrial stock out there that is related to the old economy that will have to be taken up as well. I don’t know that the industrial community fully appreciates some of the challenges down the road.
NREI: What about hospitality?
Terrell Gates: Hospitality has some real challenges as well. Valuations, even though they’ve increased, are not as toppy on a relative basis as some of the other categories, but hospitality also has probably some long-term structural headwinds compared with the other categories. As we all know, hospitality is the sector that’s most closely tied to the economy and how things are going.
NREI: Among the property types that Virtus concentrates on, one of the property segments you like most is workforce housing. Why is that?
Terrell Gates: We think workforce housing is quite compelling. Most of the product of multifamily REITs or the generalist REITs that own multifamily is either the infill class-A product or it’s the class-B that has been upgraded to class-A. The rents that they’re charging at those kinds of properties are generally targeted toward the upper end of the market. We think that’s a challenging space—rents are down, EGI [effective gross income] is down, occupancy is down in that segment of multifamily.
Yet in more of the middle-income housing, what we call workforce housing—which we define as quality, affordable housing for the masses—it’s all quite the opposite. Because there is no new inventory growth, occupancies are higher, rental rate growth is higher, EGI is up, NOI is up. We think that’s a very favorable segment of multifamily. Valuations are still pretty frothy, so you’ve got to be careful there.
NREI: Which other property categories are you finding attractive these days?
Terrell Gates: The two other categories we find compelling in our alternative property types, since we specifically do not invest in “basic food group” property types, are senior living and medical office.
There are the obvious demand drivers for those property types. The question mark is likely never going to be demand over the next several decades. The question mark about senior living or medical office is simply about your entrance pricing—in other words, your valuations, what you’ve got to pay to get in—and new supply growth.
New supply is rarely an issue in medical office because there are a lot of natural barriers to entry that keep inventory growth very low. Over the last five years, despite overwhelming demand from tenants and health care systems for more health care space, inventory growth has averaged less than 1 percent. What little inventory has been delivered is mostly replacing older, functionally obsolete product. So, for that reason, you’ve seen increasing occupancies, increasing rental rates and overall positive trends for the underlying medical office assets.
In senior living, there’s still an overwhelming demand for the product type, and there probably will be for many decades to come. We haven’t even reached the baby boomer demographic trend within senior living; we’re at the infancy of that movement and how it will ultimately drive senior living demand.
Where you’ve got to be careful in senior living is barriers to entry. A lot of new supply has come on-line in the senior living space over the last three years, especially in assisted living, which is a very compelling investment category. Where most of that new supply has been delivered is in lower-barrier-to-entry markets like Atlanta, Houston, Dallas, Denver and Phoenix. You’ve seen some real degradation in occupancies in those markets, mostly because of new supply. That’ll eventually get absorbed because there’s such strong demand for the product, and that demand is going to continue for many years to come. But in the short term, you do see some negative trends due to new supply coming to market.
Selected by the U.S. News & World Report as the #1 place to live in the U.S. in 2017, Austin is a freelancer-loving city. The fastest growing city in the U.S. houses a plethora of high-profile tech companies that fuel The City of the Velvet Crown’s gig economy. The birthplace of the Freelance Conference—that says something in itself—offers plenty of job opportunities for remote workers, who seem to thrive here.
Working from home is the handiest option, but where do you go if you want to spice up your workday? After we analyzed which were the best coffeehouses for San Franciscan freelancers, we turned our eyes to the Live Music Capital of the World. Read on to discover which are the best coffee spots in Austin where you can work in peace.
An Austin original, Houndstooth Coffee is a chain that operates six coffee bars in Texas: three in Austin and three in Dallas. All locations feature a modern and minimalistic design, with sleek, clean lines, and are freelancer-friendly. Pretty quiet, with an upbeat and calm vibe, they induce a productivity enhancing mood that might be appreciated by those of you who need to focus on pressing tasks. All of Austin’s Houndstooth Coffee shops provide different types of seating, from two-person tables to bar seats and communal tables. Two of the locations, at 4200 N. Lamar Blvd. and 401 Congress Ave., have plenty of outlets in plain sight. However, the most recently opened spot, located at 2823 E. Martin Luther King Jr Blvd., doesn’t have any power outlets; instead, it has USB charging ports near the bar seats.
Downtown Austin’s oldest independent coffeehouse, Hideout Theatre is a modern café with a historic and artsy vibe. Located right next to an improvisational theatre, it is a place that fits freelancers working in creative industries like a glove. The Hideout Theatre is spacious and provides ample seating, with lots of tables and even some cozy armchairs by the window. It usually is a good place to do some work, but it might get a bit too noisy when there’s an event going on. The Wi-Fi signal can be spotty, but, depending on what you have to do, that might not be a problem.
One of Austin’s staple coffeehouses, Caffé Medici is an ideal spot for those who want to enjoy a highly productive workday. Constantly ranking among the best places to grab a cup of French press coffee, this chain has five locations in the city, four of which are perfectly equipped to accommodate digital nomads. Each location has its own aesthetic, but they all provide ample seating inside and have a little patio outside. Most of them also offer fast Wi-Fi and plenty of outlets, so you can do your work unperturbed. Although the coffeehouses are frequently occupied by laptop users, it’s relatively easy to find an empty seat. As a bonus, most Caffé Medici spots are suitable for group work sessions.
Located right on Lake Austin’s shore, Mozart’s Coffee Roasters greets its guests with a stunning lake view. Boasting a European-inspired vibe, it’s a serene and relaxing place where you can easily impress potential business partners and lose track of time—especially on sunny days. The coffee shop features a large deck with rows of rustic benches, as well as some indoor tables, so you can take your pick. However, the number of outlets is limited, so it’s a good idea to come with your laptop fully charged. The Wi-Fi connection is not great—at least that’s what Yelp reviewers are saying—but if you don’t mind that, it might be a good place to work undisturbed. To the night owls’ delight, the coffee shop is open until 12 AM.
Another popular coffee chain, Halcyon is a cross between a coffeehouse, a bar, and a lounge that operates two spots in Austin—one at 218 West 4th St. and one at 1905 Aldrich St. Both are suitable for digital nomads, especially those who don’t mind working in a noisy environment. They can also be a good option if you want to grab an after-work drink without changing locations. Halcyon provides its customers with quite an extensive array of seating options, ranging from cozy window seats with cushions and pillows and comfortable sofas to high-top tables, bar seats, communal tables or private tables. The number of outlets available is decent and so is the Wi-Fi. If you want to treat yourself, you can always order some of their renowned s’mores.
Priding itself on being the first coffeehouse in Austin, Quack’s 43rd St. Bakery is renowned for its espresso, drip-brew and French press coffee, and for its oversized, baked-from-scratch sweet treats. Busy during rush hour, it can be a chill and laid-back workplace if you want to focus on your tasks while enjoying some baked goods. The place is quite spacious and has a decent number of tables that you can choose from. The Wi-Fi signal is good, too, and there are plenty of parking spaces in the area—a strong plus for some customers. However, the number of outlets is limited, so it might be a good idea to check your laptop’s battery before heading out.
With six coffeehouses in Austin and two more in the pipeline, the Summermoon chain is immersed in an accelerated expansion spree. Although not all locations are suitable for freelance work—the trailer in South Austin surely isn’t—most of them are designed to accommodate laptop users. The coffee shops welcome you with a homey ambiance and plentiful seating options. Depending on the location, you might be able to sit at a regular table, at a window seat, at the center island, at a laptop station, or even on a comfy armchair. There are plenty of outlets everywhere, the Wi-Fi signal is great, reviewers say, and the music is just right—not too loud, not too soft.
Specialized in direct-trade coffee and craft beers, Thunderbird Coffee is the perfect place for remote workers who like to enjoy a coffee in the morning and a drink in the afternoon. There are two locations in the city, each of them attracting a slightly different audience; you should go to the Cherrywood spot if you want to spend all your day there, otherwise you can go to the one in Brentwood. Both coffee shops bask in natural light and boast a modern design. They have plenty of seating options, but they’re usually packed with customers, so finding an empty spot might prove difficult sometimes. What’s worth noting is that the Brentwood coffee shop doesn’t have any power outlets.
Located at 2159 South Lamar Blvd., Patika is a sleek and modern café with an upscale vibe that features unique artwork and enjoys loads of natural light. If you want to have a group work session, to enjoy a highly productive day or to impress a business partner, this coffee shop would be a good option. The place provides a copious amount of indoor seating, filled with wooden tables and metal chairs, complete with a cozy outdoor patio where you can bring your dog. There are plenty of outlets in plain sight, the Wi-Fi is fast, too, and the music is nice. As a bonus, it’s relatively easy to find a parking spot in the area.
Operating three Austin locations, Epoch Coffee seems to be a favorite among the locals; however, the main attraction for freelancers is the North Loop shop, open 24/7. Boasting a homey atmosphere, it features loads of massive tables and even a few couches where you can spread out your belongings. Besides the indoor area, it has two outdoor patios filled with tables, and, most importantly, plenty of power outlets. The Wi-Fi signal is good, according to the reviews, and if you want to take a break, you can always settle down to a game of chess. Another option for those who want to enjoy a productive workday is the coffee spot located inside The Village. Although it isn’t open 24/7, it resembles the North Loop spot to a certain degree. The place basks in natural light and has plenty of tables to sit at, as well as some comfortable sofas and armchairs. According to the regulars, the Wi-Fi signal is good and the place is a bit quieter than the North Loop location.
A house turned coffee shop, Seventh Flag Coffee is the ideal second office when you want to work while enjoying some fresh air in a relaxing and laid-back environment. With a clean, rustic-minimalistic aesthetic, the place has a chill, creativity inducing vibe. Inside, the coffee shop is full of laptop users who transform the large communal tables and the high-top tables into workstations, especially since there’s a decent number of outlets available. Outside, the huge dog-friendly yard is filled with picnic benches, porch spots, and chairs facing the sidewalk. As long as your laptop has enough battery and the weather is nice, you can complete your tasks stress-free.
A small place with a deeply hipsterish vibe, Figure 8 Coffee Purveyors is an eclectic café abounding in luscious green plants. Frequented by a few local artists, this place is a haven for Millennial digital nomads. On rainy days, those of you who want to camp out with your laptops here can take a seat at the bar, at one of the indoor tables or at the large communal table. On sunny days, you can choose to occupy a two-person table outside, or, if you’re having a brainstorming session, a picnic table. Either way, you have plenty of options.
Based in San Antonio, Merit/Local Coffee has recently entered the Austin market by opening a coffee shop at 222 West Ave. The place is small, but cozy, and features a minimalistic design that’s in tune with the general aesthetic in the area. It boasts a hip, productivity inducing atmosphere that might suit you if you must finish something quickly. The seating, however, is limited, so finding an empty seat might be a challenge. There’s a communal high-top table, some window seats, as well as a few regular tables inside, accompanied by some tables outside. Of course, there’s free Wi-Fi.
A small and charming South American Bakery, Café Nena’i is a warm and welcoming place located in East Austin, at 1700 Montopolis Drive. This coffee spot has a laid-back atmosphere, ideal for those who need some quiet. It’s mostly a stop-and-go place, but it does have a few indoor and outdoor seats. Laptop-bearing customers can make full use of the small four-person communal table or can sit at the high-top window table. There’s also a small two-person table inside, if you want to hold a business meeting. Considering the size of the place, the seat-to-outlet ratio is excellent. In addition, Yelp reviewers say the Wi-Fi is pretty good, too.
Warm and welcoming, Vintage Heart Café is a small, cozy place where you can easily lose track of time and spend all your day. Featuring a mixture of modern, industrial, and vintage aesthetics, it has a friendly vibe emphasized by the soft background music. The coffee shop has a decent number of two-person wooden tables, a few four-person tables, some velvet couches and a few barstools. There are quite a lot of outlets, free Wi-Fi, and even a small parking lot in the back. At the same time, the place also has a small outdoor patio where you can work with your dog resting next to you.
The survey, based on more than 500 responses, found that companies using flex space felt agility was the greatest value, allowing them to assign employees to a space on short notice.
A new survey from The Instant Group, a workspace innovation company, and the global architectural firm HLW, asked co-working operators, landlords and corporate and private occupiers how a flexible workspace approach impacted their businesses.
The survey, based on more than 500 responses, found that companies using flex space felt agility was the greatest value, allowing them to assign employees to a space on short notice, as well as easily expand or reduce the amount of space at any site when needed. They also cited added benefits, including reduced real estate costs, flexibility and greater productivity.
The survey also found that while company respondents were neutral about the brand of a flex space operator, nearly half (42 percent) want elements of their own brand in the space they occupy. The report’s authors suggest that this is an area operators need to address to broaden their appeal.
“Choice of an operator brand is geographical, because there aren’t many national or global co-working operators like WeWork and Spaces on the scene yet,” says Ryan Hoopes, Dallas-based senior associate at real estate services firm Colliers International, who heads the firm’s global flexible workspace advisory practice.
The survey found that landlords, on the other hand, are concerned with an operator’s brand, as they believe the presence of flex space might impact their buildings’ value and that an operator’s brand may contribute to the building’s worth.
Hoopes says that there is debate around whether the presence of a flex space operator does, in fact, boost the value of an office building, and suggests it depends on the buyer. “We are on the side that believes that while it may currently not add value from a capital markets standpoint, it almost certainly adds significant intrinsic value to an asset that will translate much better as the flexible workspace movement builds,” he notes.
The survey found that the number one driver for landlords to add a flexible operator to their building is that it brings in new tenants. “Co-working space provides a low barrier to entry for small businesses and start-ups that may eventually grow into larger spaces of their own,” Hoopes says. “Co-working space is a product of businesses no longer wanting to make a long-term real estate commitment.”
He adds that a report from Deloitte’s Center for the Edge found that 50 years ago the life expectancy for a S&P 500 company was 75 years. Today it’s 15 years and declining.
End users of flex space said that flexibility and adaptability—the ability to choose where and when they work—have a positive impact on how they engage with work. Other benefits include expanding their professional networks, business opportunities and a greater feeling of energy. Nearly half of respondents (42 percent) expect to spend less time working in a traditional office setting in the future, but a larger portion of occupiers (55 percent) see themselves working from a variety of locations.
As a result, an overwhelming majority of flex-space occupants cited wireless connectivity and wireless security as the most important technology-related features in their workspace, as those factors support work flexibility.
John Williams, who heads marketing at The Instant Group, attributes growth in flex space to operators’ understanding that end users want community and experience and are catering to these desires. Borrowing from retail and hotel operators, he says they are creating workplace destinations, which represents a sea change in the office sector.
The report notes that the range of co-working and flex space has grown exponentially. As the market is made up of predominantly smaller operators, they are in a position of knowing their target audience well and can tailor their offerings accordingly.
Growers Square, a three-building office project in Walnut Creek, Calif., is under new ownership. Investment management company Invesco, represented by NKF Capital Markets, sold the property to Rockwood.
“Walnut Creek has experienced a renaissance that has brought high-end restaurants, shopping, and nightlife to the downtown core – making it one of the Bay Area’s true 24-hour cities. The property’s location at the heart of this revival was an added benefit to the buyer,” said Steven Golubchik, one of NKF’s Vice Chairmen.
The Class B office complex consists of a 75,000-square-foot, six-story building at 1646 North California Blvd., as well as two three- and six-story buildings encompassing 100,574 square feet of space at 1656 & 1676 North California Blvd.
According to Yardi Matrix data, the property located in Contra Costa County houses 28 tenants active in a variety of fields, such as finance, healthcare, law, asset management, IT, and consultancy. Some of the high-profile companies operating on the premises are River City Bank, Pacific Life Insurance, BKF Engineers, John Muir Health, Westamerica Bank, and TelePacific Communications.
Originally completed in 1986, Growers Square was cosmetically renovated in 2016. The complex includes 2,000 square feet of retail and a four-level parking structure that features a 2.7-per-1,000- square-foot parking ratio. The property also offers immediate access to both the Bay Area Rapid Transit system and the area’s dense retail core.