Factory Conversions Spark Tech Office Interest

Learn what’s driving technology, media, and other information-related firms to look at repurposed industrial buildings for their workforce.

October 23, 2015

The vaulted ceilings, plentiful open space, and solid brick construction common to older industrial buildings are proving to be a draw for many companies, particularly in the technology sector.

The phenomenon is being driven by both the bottom line and by cultural preferences. It’s primarily occurring in urban and suburban markets where office space and land are expensive. But also, many of these young tech companies find traditional office buildings passé.

“It’s happening in areas near downtowns popular with technology and creative companies, and it has gone further than that,” says Colin Yasukochi, director of research and analysis at CBRE in San Francisco. Though he notes that this trend isn’t brand-new, it has intensified during the current tech boom. “This dates back to the original dot-com boom [of the late 1990s] … Firms are looking for lower-cost buildings with a creative work environment. Many older industrial buildings fit that profile.”

In 2012, Twitter moved employees into an 11-story former wholesale furniture mart at 1355 Market St. in San Francisco. It’s part of the Mid-Market neighborhood, an area that even today struggles with the fallout from high levels of drug addiction and homelessness. But that didn’t deter Twitter, and the social media titan isn’t the only entity to find the building, known as Market Square, attractive. Several weeks ago, San Francisco–based Shorenstein Co. sold a 98 percent share of Market Square to JPMorgan Chase in a transaction valuing the building at $920 million. The $835-per-square-foot price tag was the highest for a large San Francisco office building since 2007, according to Real Capital Analytics, an international analytics firm focused on commercial investment.

It’s not just San Francisco that’s seeing increased interest in former industrial buildings. Sony Corp.’s PlayStation division occupies a former U.S. Postal Service sorting building in the Playa Vista neighborhood of Los Angeles, a neighborhood where Google has office space too. Meanwhile, both Google and Facebook have a presence in former manufacturing areas in lower Manhattan. And Time Inc. is moving 300 back-office and technology jobs from Manhattan to Industry City, a repurposed factory complex in Brooklyn.

In addition to tech companies, the spaces are appealing to advertising, media, and other information-related firms. The open areas allow a collaborative set-up: low- or no-walled workspaces and high, airy ceilings cut down on noise. In addition, the open layout means “you can have amenities like foosball and darts,” says Jim Costello, senior vice president at RCA.

The question of who wants space in a former industrial building can almost be narrowed down to a dress code, says Paul Leonard, real estate economist for commercial research company CoStar Portfolio Strategy: “It’s people who don’t wear a tie.”

So it’s not for everyone. Law firms and financial service companies in particular tend to prefer traditional office space. They prize private offices and don’t want their clients to think they spend work hours playing foosball. “I’m hearing negative feedback from some tenants” about the open-space configuration, says Ryan Severino, senior economist at commercial real estate research firm Reis in New York. He says clients complain that it’s difficult to get their work done and that viruses and colds travel more easily without physical barriers.

But the number of companies throughout the service sector that seek such space is likely to keep growing, according to industry analysts. “The trend has moved beyond technology companies. The more open and collaborative work environment is spreading to all industries,” says CBRE’s Yasukochi. His own company decided to opt for more open work environments in its new offices, “because we think it inspires higher collaboration and productivity.”

Besides San Francisco, New York, and Los Angeles, the cities that have enjoyed success with converted industrial buildings include Chicago; Boston; Seattle; Washington, D.C.; Cleveland; Atlanta; Austin, Texas; and Cambridge, Mass. Inventory issues may hamper some areas, as older cities are where the bulk of industrial facilities are located.

Companies are looking for space in “buildings that have good bones,” Leonard says. Structures that have been abandoned for too long, such as many in Detroit, won’t cut it. Look for buildings with high ceilings and minimal vertical beams, which can destroy the space’s openness, Leonard explains.

“You need an ability to upgrade inside, with modern HVAC, water, plumbing, and electricity at a reasonable cost,” Leonard says. A building with heavy remediation requirements, such as asbestos removal, might prove more costly than it’s worth.

The development surrounding the industrial buildings is also important for real estate professionals to watch. Leonard notes that the traditional pattern begins with artists and other bohemians moving into former industrial spaces and sparking renovation of buildings. That’s why such buildings are often first converted into apartments and then later into offices. “You have to have that first,” Leonard says. “People want a live-work-play environment. And the location has to be sufficiently gentrified.”

He notes that while this trend is already in full swing in many cities, other areas may follow, including Nashville, some smaller Midwestern cities, and other areas where new building is limited by cost, space concerns, or political opposition. Leonard says this trend of converting industrial space to office use “does seem to be the wave of the future, whether it’s dictated by tenant wants or economic needs.”

Dan Weil has worked as a reporter at Bloomberg, Reuters and Dow Jones, where his work appeared in The New York Times and The Wall Street Journal. He is now a freelancer, and his work has appeared in Institutional Investor, CBS Money Watch, Bankrate.com, Slate, The Fiscal Times, The Street.com, The Real Deal, Foxsports.com and Tennis magazine.