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Ford Factory Courtesy Shorenstein
Ford Factory

The ROI of Converting Class-B Buildings to Compete with Class-A Buildings

Class-B buildings currently represent an underserved value for owners and developers.

Partner Engineering and Science rents 40 offices in markets throughout the United States. Most are in class-B buildings, some are in class-A, and very few are in class-C. Which of the three yields the highest employee satisfaction? Often the class-B+ offices. What I mean by class-B+ is that the office is situated in a class-B building, but the space has been repurposed and augmented with features reflective of a changing marketplace trend towards the live/work/play environment.

Class-B buildings currently represent an underserved value for owners and developers. They offer a lower barrier to entry, with plenty of vacancies and economical prices, while there is an oversupply and stagnant demand for expensive class-A properties. More importantly, class-B buildings allow developers to implement location-specific amenities and work-life convenience for an evolving millennial work force, and recoup ROI from operation efficiency, full occupancy leasing and sales of converted buildings.

Class-B buildings provide opportunity and flexibility

I have found opportunity when class-B spaces are cheaper, larger and more flexible than their class-A counterparts. In a larger, less expensive space, you have the room and the budget to customize or add in fun new features. This trend seems to be growing across the country, as a diverse array of businesses utilize repurposed spaces in flexible ways. Phoenix’s vaunted downtown Warehouse District will get a new addition as Arizona’s Scientific Technologies Corp. will occupy a converted 26,000-sq.-ft. warehouse previously used as a packaging and distribution center. In Dallas’s posh Uptown district, a historic building that once housed a cabinet manufacturer is being converted into one of the largest cutting-edge office spaces in the country.

Here in Los Angeles, two recent high-end examples of conversion value are the renovated Gensler and the Warner Music office spaces in downtown Los Angeles. In both cases, they were occupying outdated, stodgy accommodations away from emerging hot spots, and decided to upgrade class-B and C -spaces in more convenient and rapidly developing areas. Gensler is a design firm whose work and thought leadership are centered around the future of work space trends. After three decades in a generic law office building, the firm’s executives wanted to “walk the walk” with an office space that emulated Gensler’s creative identity. They bought an old Bank of America office complex in downtown Los Angeles, previously unoccupied for 10 years, and converted it into a gorgeous, collaborative, efficient 45,000-sq.-ft. foot multi-purpose working space. Warner Music took over the historic Ford Factory Building (previously housing American Apparel) and will convert the industrial space to hold 254,000 sq. ft. of contiguous creative office and retail space.

Maximizing value from a class-B conversion

Bob Ruth, of The Ruth Group, regularly leverages the opportunity and value of class-B and -C buildings to create elite, retrofitted office space that commands much improved rents. He feels that the money saved from acquiring a lower-tier space can be channeled towards high-end features and adaptations. But be careful to have an endgame before embarking on the conversion process. “Most of these projects end up over budget and over time, which is dangerous,” says Bob. “Know where you’re going and what the tenant wants.” Start with engineering fundamentals that create a competitive, modern, efficient and usable space with the amenities that today’s elite workforce talent expects. As Bob notes, “Design from the inside out.”

Use knowledgeable industrial engineering and construction consulting to implement benchmarking, MEP systems and capital improvement projects. Adapt the office space with natural light, open spaces, polished floors and sustainability features. Millennial employees routinely expect on-site food trucks, bike shares and bike lanes, physical proximity to public transportation, shared ride services capability and even dog parks.

You can further augment your building with soft value. Install plant walls and rooftop gardens and green spaces. Improve indoor air quality for productivity, and offer natural air with operable windows where possible. Install sustainability and energy efficiency features to qualify for LEED certification.

Collectively, these measures attract and keep quality tenants, help businesses compete for top employees, and enjoy ROI both from a happy, productive workforce and an efficient building.

Class-B and -C buildings can also be turned into class-A buildings

The historic Ford Factory Building is but one of several high-profile deals that have transitioned from class-B physical real estate into premier class-A product. In Los Angeles’s South Bay enclave, El Segundo has seen several assets complete significant renovations from old, tired class-B structures into some of the coolest creative office campus build-outs anywhere in Los Angeles. El Segundo has a large stock of inventory formerly used by defense contractors. These buildings, historically non-descript government-oriented buildings, have provided architects with an amazing canvas to implement cutting edge office build-outs and completely re-purpose the physical real estate to appeal to tenants from industries including entertainment, tech and media. The Apollo at Rosecrans, for instance consists of five buildings originally constructed between 1970 and 1980 to accommodate defense contractor usage.

Invesco Real Estate, along with its partner Second Street Ventures, purchased the largely vacant buildings in 2012 and embarked on a significant capital repositioning initiative. With their architecture teams, Invesco and SSV were able to re-conceptualize the buildings into exactly what Los Angeles’ prevailing creative tenant seeks.

By cutting in operable windows and sliding doors, garage roll-up doors, exposing the high ceiling heights and adding outdoor amenities, the properties were completely transformed into what is today considered one of the city’s premier creative office settings. Invesco and SSV sold Apollo at Rosecrans in 2016 and achieved a record price per foot of $605 for an El Segundo office sale. Similar success stories exist in El Segundo, with notable transactions including Campus 2100 and 2101 El Segundo. All three of these projects represent highly successful conversions of former class-B space into highly-regarded class-A space that commands among the submarket’s highest rental rates.

Partner Engineering and Science’s class-B conversion of current office space

Partner purchased its current Torrance building in 2011, and completed a major renovation to make it the perfect home for our headquarters. The 20,000-sq.-ft. building currently houses 60 Partner employees, and can comfortably accommodate up to 100. The building was visualized as a great space for our rapidly growing staff, as well as a prototype for showcasing our energy efficiency and due diligence services.  The renovated green building has a very open, modern and collaborative space, which reflects and facilitates our team interaction and our mission to be the best home for talented professionals in our field.

Pacific Bell built our current building in 1960 and occupied it until 2000. By the time we were scouting the property, it had been vacant for 10 years in a derelict and halfway-gutted state. After performing a range of due diligence assessments for contamination and physical conditions, we did an eight-month renovation and structural retrofit of the building. Basic structural work included adding significant steel members, stripping down to the concrete, redoing the interior into sleek, interactive office space, adding a third-floor conference room and deck lounge on the roof, and repaving and landscaping of all exterior areas. We practiced what we preached:

We are LEED-certified, we have “smart” and environmentally-friendly (and cost-saving) features. Solar power provides about 50 percent of our overall building energy requirements. We also have two living plant walls, along with a real time indoor air quality monitoring system. Do we get a return on these features? Well, our original headquarters was in South Bay’s premier class-A office complex and our employees unanimously prefer the current space. Cool class-B can beat class-A!

New trends in corporate buildings

A new wave of operation is shifting towards smaller, more compact, more flexible spaces, with open areas for collaboration and lifestyle benefits. Recruiting in a robust economy is a priority, and is influencing a transition of up to 20-30 percent of all corporate space, even in notoriously conservative sectors like law and business.

companies are routinely asking “Where do tenants want to go and what are the features that are going to make them stay there?” Focus on attracting your desired tenant demographic and renovate class-B buildings to meet those needs. You may find that you can get close to class-A rent.

Joe Derhake, PE, serves as the CEO of Partner Engineering and Science, a national environmental and engineering due diligence consulting firm. Derhake has over 25 years of experience as a professional engineer. He is a registered civil engineer.

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