Recreating Downtown

03 Jan, 2013

Market Square, pictured, formerly a merchandise mart, is being transformed into a Class A corporate office location in San Francisco’s up and coming Mid Market neighborhood.  The 1-million-square-foot property is already home to Twitter, online retailer One Kings Lane and business social networking site Yammer.

By Andrew Neilly

In This Article

Corporate locations are changing as a shift from the suburbs brings more young, growing companies into the downtown core.

Not so long ago, the “coolest” corporate spaces seemed universally restricted to sprawling suburban campuses where fast growing, dynamic companies could express themselves through their real estate. The Apple campus in Cupertino, Calif., Microsoft in Redmond, Wash., and online retailer Zappos’ headquarters in Henderson, Nev., are just a few of the many examples.

Yet, as technology and its many closely related business sectors such as social and digital media, marketing and web-based commerce have expanded, so too has the need for companies to recruit and retain talent. Chief among the targets for many of these companies are the Millennial or Gen Y generation — those born in the late 1970s and early 1980s through 2000 — many of whom are making their first foray into the workforce or are beginning to move up the job ladder. This portion of the workforce, it seems, places a very different importance on their work environment than prior generations.

Perhaps the most important trend to come out of the demographic shift taking place at many companies, not just in the Digital Economy but in other sectors too, is the move back to the city and, with it, the desire to re-use older buildings.

When Facebook was planning its new Palo Alto, Calif.,campus, the company actually polled employees to find out what they wanted in an office environment. The result was big, open floor spaces and high ceilings creating a bright, airy work environment. The expectation is that the next generation — Gen Z — most of whom are still in high school or starting college, won’t be much different when it comes to wanting a cool place to work.

This trend has manifested itself in corporate campuses in many ways, but especially in design and construction. At Zappos’ headquarters in Henderson, Nev., there are no doors or walls obscuring management from employees and the C-Suite resembles a newsroom rather than an executive office. At Google’s Palo Alto campus, no employee is more than 300 feet from food, so the large, wide-open floored offices are peppered with kitchens, dining areas and snack bars.

The Trendy Urban Core

Perhaps the most important trend to come out of the demographic shift taking place at many companies, not just in the Digital Economy but in other sectors too, is the move back to the city and, with it, the desire to re-use older buildings.

Center city locations are growing in appeal again partly because that’s where young workers want to live but also because urban cores are also a lot easier for workers living in the suburbs to get to. Center cities typically offer a greater variety of public transit options and with more cities offering car pool and High Occupancy Vehicle (HOV) lanes to commuters and innovations such as ridesharing, commuting into the city is often less of a hassle than commuting to far flung suburbs. There’s a feeling too among many corporate leaders that being in the city keeps both the company and its employees on the cutting edge of new trends. That’s certainly true in markets such as San Francisco where the next Facebook may be starting up in business in the suite next door.

This shift in tenant demand is leading traditional office developers to one real estate developer who detected the shift back to the cities early, largely because the majority of its investments are in the urban core, was San Francisco-based Shorenstein Properties LLC. The company has built, owned and operated some of the most iconic downtown properties in the nation during its roughly 75-year history, buildings such as San Francisco’s Bank of America tower and the John Hancock Center in Chicago. As a result of such investments, Shorenstein was perfectly positioned to detect major trends in corporate headquarters.

The trend toward companies moving downtown is not restricted to major cities such as San Francisco, Chicago, New York City and Boston. A renewed focus on downtown is also occurring in so called secondary markets like Minneapolis, Oakland and Pittsburgh.

One of the company’s earliest forays into meeting a new kind of space demand — older buildings in urban cores which could offer large, efficient floorplates in which tenants could set up interactive work environments- was its 2004 investment in the 2.3 million- square-foot Starrett Lehigh building in New York’s Chelsea submarket. Built in the 1930s, the building was for many years used as a freight terminal and warehouse but by the end of the 1990s was transitioning to use as office space. After executing on its ownership strategy, leasing and serving tenants such as Martha Stewart Living Omnimedia Inc. and Tommy Hilfiger USA and other design, creative and entertainment tenants, Shorenstein sold its interest in 2011. The experience convinced company executives that similar properties could attract and appeal to an upswell of demand among a broad range of tenants.

The proof of this came in March 2011 with Shorenstein’s acquisition of Market Square, a 1 million-square-foot office and retail complex in San Francisco’s transitional Mid Market neighborhood. Formerly a merchandise mart catering to home furnishings manufacturers, distributors and retailers, Market Square was just 12 percent occupied across its two buildings when Shorenstein acquired the property. The former owners’ vision was to convert both buildings to higher end office and retail space but plans were curtailed by the sharp market downturn in 2008. By 2011, Shorenstein had negotiated to buy Market Square and use its capital to renovate it to Class A office standards. At the same time, Twitter.com, the San Francisco social media firm, was looking to expand into a new headquarters location. A deal was consummated and Twitter moved into its space in summer 2012 and has since expanded several times. Since Twitter signed, Market Square has added three other major tenants: CallSocket, a high-tech incubator providing real estate and financing for startups; One Kings Lane, an online membership-only retailer; and Yammer, a social networking site for businesses. The property now anchors the city’s Mid Market revitalization efforts, which has seen residential development begin and other investors and companies acquire buildings in an area that was previously a transitional neighborhood between the city’s commercial district and inner residential neighborhoods.

Since investing in Market Square, Shorenstein has embarked on several high-profile redevelopments in or near downtown core locations. On Los Angeles’ Lower Westside, the company is venturing with a local developer to redevelop a 380,000-square-foot postal distribution center, which had lain largely vacant since 2005. Renamed The Reserve and due for completion this year, the property will offer one of the largest blocks of contiguous creative office space on the Westside of Los Angeles.

In January 2012, Shorenstein purchased 350 West Mart Center, a 1.2 million-square-foot former apparel mart in Chicago’s River North submarket. Much like Mid Market in San Francisco, River North is fast becoming a 24/7 neighborhood with increasing urban living opportunities aimed at younger residents. That is attracting a broad range of businesses from tech startups to global law firms to the area and leading Shorenstein to invest $75 million to complete the building’s transition from low cost commodity office space to a Class A corporate location.

In Boston, the developer acquired and is renovating 400,000 square feet of space in the Seaport District, a rapidly evolving live/work/play waterfront district once an industrial neighborhood. The Seaport has benefited from Boston’s recent investment in transportation infrastructure, notably the Central Artery/Tunnel project (or the Big Dig) as well as the opening of the 1.7 million-square-foot Boston Convention and Exhibition Center. Tenants who have moved to the area include the Boston Herald newspaper, J.P. Morgan, Monster.com and Acetylon Pharmaceuticals.

The trend toward companies moving downtown is not restricted to major cities such as San Francisco, Chicago, New York City and Boston. A renewed focus on downtown is also occurring in so called secondary markets like Minneapolis, Oakland and Pittsburgh. While there will always be a need for suburban campus space among corporate tenants, the current trend toward urban campus environments is gaining significant traction and leading to a renaissance among many of America’s downtowns.

Andrew Neilly is a partner with Gallen.Neilly & Associates, a media strategies consultancy based in Walnut Creek, Calif.  He can be reached via e-mail at andrew@gallen.com. Learn more about Shorenstein Properties LLC.

Illustration by Stuart Miles at Free Digital Photos.net

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