Physical community has suffered since the pandemic, and some commercial real estate property classes have felt these aftershocks more acutely than others.
In this two-part series, our Director of Brokerage, Neal Swanson, will explore the changing landscape of office investments and show why “tenant mix”—historically a retail investment strategy—should no longer be a term reserved for shopping centers. This article shares recent examples from NAI Elliott’s work with office owners and managers. Next time, we’ll provide some interesting context and practical takeaways for office investors.
Community through property activation
In commercial real estate, we frequently discuss “activation,” or the ongoing presence of people as they use and move through a property. Increased foot traffic usually equates to higher revenue, but property activation is about far more than making sure rent gets paid; it’s also about sustainability and the long-term success of properties as part of a larger community.
Some of the clearest examples of this concept can be found in shopping centers. I’m sure we can all point to long-standing retail zones that have also become community hubs that neighborhoods depend on over decades (and even lifetimes). These centers typically contain a strategic arrangement of diverse, complementary tenants—think of a grocery retailer next to a pet supply store, bank, liquor store, dry cleaner and café.
This is known as “tenant mix.” Properties designed with a strong tenant mix allow people to take care of multiple errands in the same outing, but they also help fulfill the core need to live, work, shop and recreate alongside other people. It’s a strategy that’s good for business and good for community.
Lessons from retail
Some office building owners in our post-pandemic world have begun behaving like retail property owners have historically: they’re adding diversity to their tenant mix. Instead of pursuing only publicly traded professional service firms that pay the highest rent, these owners might have a mix of large and small companies representing several industries—a strategy retail has proved is not only financially sound, but also sustainable over time.
Here are several recent examples of how strategic and creative thinking around tenant mix has helped office owners activate their properties, stabilize their investments and enhance their communities.
Example 1: A ground floor gym provides mixed-use office activation
We worked with a building owner who noticed tenants left the office and walked five blocks to go to the gym. They also noticed that no one from the public was interacting with their property, and the building wasn’t attracting anyone other than the people required to work there. The owner thought about adding a gym in the building, but envisioned what most of us do when we think of in-office gyms: inadequate equipment packed into a stuffy room with bad lighting. So they came up with a creative solution and offered ground-floor space to an independent gym operator at a reduced price.
This approach provided multiple benefits. Not only do tenants in the building get to use an independently operated brand-name gym with proper equipment, lighting and ventilation—making the space even more attractive and more premium to future tenants; but the gym also provides an integrated, activated asset within the neighborhood, increasing traffic and community interaction.
Example 2: An office in a growing neighborhood recruits a veterinarian
One small office building on a busy corner had two tenants: a financial advisor and an accountant. The surrounding neighborhood was changing, and more than 1,000 apartment units were set to be added over 10 years within walking distance of the property. When one of the office spaces came available for lease, the owner received many offers from other financial service firms who wanted to take advantage of the beautiful buildout and second-generation space.
But the owner didn’t think that was best for the changing neighborhood. They ran an analysis and discovered there wasn’t a veterinarian within two miles of the property. Knowing a vet likely couldn’t support itself until many of the new living units were completed, they offered a significant rent reduction for two years, followed by stepped rent. They found a tenant and struck a deal, and the new practice opened a year later.
As it turned out, demand for a vet was already so strong in the existing community that they didn’t have to wait two years to hit profitability. And all this success story took was a creative landlord willing to take a risk for the betterment of the community.
Example 3: Portland’s oldest public charter school finds a new home in an office building
I can’t leave out the Emerson School, a project-based charter school that recently renovated the ground floor of a downtown Portland office building for classroom use. This lease is a fantastic example of community activation as a result of thinking creatively about office tenants. You can read about Emerson School and its new home at Harrison Square in our April 2024 newsletter.
These are just a few of the exciting tenant communities my team has seen develop as owners, property managers, tenants and clients all share in ongoing efforts to regroup and rethink known ways of working and living together. Collaborating to build a world that benefits everyone is hard work. Our clients keep impressing us with their considerable ingenuity and perseverance—and inspiring us with their deep dedication to local community thriving.
Practical takeaways for community-minded office owners are coming up next! Watch for part two in our June 2024 newsletter.
