In today’s evolving real estate markets it’s no longer just the modern office towers clustered in city centers or the strategically located business parks that are considered to be core property assets.
New spaces are entering the core asset class like never before. Last year, the building transaction with the highest price per square foot in Chicago was 1K Fulton, a 100 year-old former cold storage building. The structure has been transformed into a WELL, LEED Gold and LEED Platinum O+M certified, Energy Star-rated space offering flexible floor plates.
“Usually the highest price per square foot is in trophy buildings – many of which can be found in some of the well-known skylines of America’s cities,” says Christian Beaudoin, JLL’s Director of Research in the U.S. “Now, some established office buildings are worth less than a loft building in Chicago’s Fulton Market.”
It’s not simply a question of location. Companies are increasingly looking for creative, customizable spaces with large, open floor plans and amenities to attract and retain talent. This trend initially started with technology firms but has now spread to a wide variety of industries. “Customization is the key word,” Beaudoin explains. “Companies want spaces that have characteristics unique to their culture and style of working.”
At 600 West Chicago, for example, tenants have a huge, open space and are able to inject their sense of brand, place and creativity. As a result, the building has almost no vacancy and strong demand from investors.
New core assets for a new era
Core property assets are a key part of the global real estate market, balancing low volatility with lower investment returns. In contrast, value-add buildings are more risky but need more work, while Class C assets or value assets are bought for a low price in the hope that their value will increase.
“Generally speaking, core property represents a high-quality, high-occupancy space with a stable tenant base,” Beaudoin says. “But the definition of core today seems to be shifting.”
Throughout the country, creative buildings are commanding higher rents and values than traditional Class A office towers. That’s true in New York’s Midtown South and Portland’s Pearl District, and it’s a trend that Beaudoin believes will continue in the office sector. “It’s happening all over the country and will continue to spread to secondary markets. Western Europe and the UK including London are experiencing this trend too,” he says.
However, there is still very much a place for traditional office buildings – it’s what companies do with the interior space that really counts in creating a modern, engaging workplace, according to Beaudoin. Prudential Plaza in Chicago is one example of taking a creative approach within a traditional office structure. The building completed an extensive renovation that produced inviting common areas and amenities such as an expansive tenant lounge and rooftop deck overlooking Millennium Park.
As companies continuously strive to provide unique, customizable spaces to their employees, the definition of a core asset will continue to evolve. And for investors, the hope remains that yesterday’s loft or warehouse could become tomorrow’s Class A office.
The term “core” is being redefined in other ways too. For more on how, check out this article.