A new generation in the corporate world, otherwise known as the millennial generation, is dramatically changing the expectations that people hold for their workspaces. The old-fashioned standards for an office, which meant drywall covering all walls, desks separated by cubicles, and rooms lit by fluorescent tubes are no longer acceptable. The millennial generation wants spaces with exposed brick and historic authenticity, where they feel comfortable working, thinking, and collaborating creatively among their peers. Yet, by and large, institutional capital players have been slow to embrace these emerging norms.
The basis of new office space will need to be one of comfort and camaraderie, where employees are surrounded by an environment much more similar to how they live and play. An antique bureau or hand-carved wooden door will belong in a modern workspace much more so than metal filing cabinets or IKEA particleboard tables. The demand for a new sort of workspace will become the norm rather than the exception — both a tremendous opportunity for and challenge to existing modes of investment.
Meeting Demand for How People Will Want to Work
For the past half decade, as President of Rising Realty Partners, I have been focused on the enormous shift the millennial generation will drive and how we in the real estate industry must rethink our models and aesthetics. For example, Rising Realty Partners (RRP) acquired PacMutual in the heart of downtown Los Angeles about a year ago. Over the last twelve months, RRP peeled away 50 years of drywall, paint, and carpet to bring the building back to its historic Beaux Arts-style beauty. In the process, we executed a 60,000 square foot lease with NastyGal, the largest online retailer to 18-24 year-old women and one of the fastest growing companies in Los Angeles. We have also executed leases with two restaurants, Tender Greens and Le Pain Quotidien. The mix of tall, board-formed, concrete ceilings, exposed brickwork, and polished concrete floors with a 24-hour urban feel has taken the project from 60% to 90% leased in 12 months.
The big, plastic, corporate veneer embodied by traditional office space is unacceptable to most companies today. When people live and work in a space, they want to experience natural light, organic architecture, and the feeling that there is a social dynamic outside of just their workspace. At PacMutual, we have succeeded in large part by revealing and emphasizing the already-existing natural built environment. Imagine: the previous owners covered marble floors and handcrafted crown molding with nylon carpet and gypsum drop ceiling tiles.
Yet, when we acquired this property the vast majority of institutional capital disagreed with our premise, preferring instead to focus on suburban office complexes surrounded by moats of surface parking lots. Despite what we saw as clearly manifest trends, many traditional capital sources doubted that downtown infill redevelopment of a historic building would be successful. While we have succeeded despite their misgivings (already outperforming our projections of +20% IRR), our success should punctuate a larger message. We, the real estate developers and investors, must embrace the culture and values of the millennials when we build new workspaces. Those who do will be rewarded and those who don’t will become irrelevant.
Rising Realty Partners is a privately held real estate operating company focused primarily on coastal markets in California. Rising Realty Partners strategy is to transform its investments into institutional quality assets by leveraging the development, operational, financial and turnaround expertise of its partners and its team.