Despite high vacancy rates in the office market – the countywide vacancy rose from 14.4% the first quarter of 2019 to 24.1% the first quarter of this year, according to data from Jones Lang LaSalle Inc. – some developers are still betting big on creative office space.
Enter Santa Monica-based Redcar. The firm recently closed on Redcar Fund II with $418 million in equity commitments. Its Fund I, which closed in 2020, acquired 15 assets that will have 1.4 million square feet of development when completed. All are in high-growth submarkets such as Culver City and Chinatown.
The new fund focuses on creative office conversions, and already has a portfolio of 12 assets. Investors include endowments, asset managers, private pensions, public pensions, family offices, insurance companies, financial institutions, foundations, wealth managers and high net-worth individuals.
“We see increasing demand for our product as tenants pursue a flight to quality in their office-space needs,” Christopher Chee, co-managing partner at Redcar, wrote in an email. “While entertainment and gaming companies have long found our space more attractive than high-rise buildings, we have also seen an increasing number of tenants in other industries prefer our type of space.”
While Redcar’s first fund focused exclusively on L.A., the latest fund will also be used for assets in Austin, which the firm expanded to in September.
The second fund is also larger than the first fund, which Chee said was notable given a more challenging fundraising environment.
The office market is also different today than it was at the time of Redcar’s first fund.
But despite high vacancy rates in the overall office market, creative office space is seeing demand.
“In the past year, we’ve seen some tenants that would have gone to a high-rise, or coming out of a high-rise, are moving to (creative office spaces),” said Nicole Mihalka, a managing director at JLL. “They like the branding, the ease of access, the workforce comes in and almost feels like they are coming into a luxury home.”
She added that adaptive-reuse projects and converted industrial buildings, especially high-end conversions, are enticing to tenants now.
“It’s not just a flight to quality, it’s a flight to luxury,” Mihalka said.
Albert DePlazaola, a senior principal at workplace strategy and design firm Unispace, said he is expecting to see tenants start to make more decisions about their future office space needs as the “wait and see period is coming to end.”
“More creative office spaces are going to come into play,” he said.
He added that employers are “eager to get people back” into the office, and having desirable workspaces was a part of that.
Chee said tenants are interested in the type of creative spaces Redcar has focused on and will continue to focus on with its new fund.
“Demand for our creative space has grown as tenants prefer our product in comparison to commodity high-rise space with elevators, inoperable windows, wall-to-wall carpeting and a lack of natural light and air,” he said.
He added that tenants want outdoor patio spaces, windows they can actually open and direct entrances, something Redcar is working on.
DePlazaola said another benefit of creative office spaces for employers is that they often have smaller footprints than conventional spaces, perhaps, for example, with fewer individual offices and less space, since everyone is not coming in every day. That means the experience of coming into an office without the high cost associated with larger spaces.
“There’s a win-win business case that appeals to CEO and HR folks,” he said.
DePlazaola said there is now a 20% gap between tenants returning to work in class A and class B buildings.
Areas of interest
One of Redcar’s biggest focuses right now is Culver City, where 50% of its first fund and 40% of its second fund is invested.
“Culver City has benefited from new transit infrastructure, safe and clean streets, its central location and the significant growth of both Apple and Amazon’s presence, in addition to HBO’s new headquarters and Sony’s studio lot,” Chee said.
The company also has a lot in the works in Santa Monica, Chinatown, Silver Lake and Frogtown, focusing on building near transit.
In fact, the company’s focus on transit is how it got its name: it is named after the Pacific Electric Railway’s Red Car trolley system.
The company primarily converts industrial buildings into creative office spaces, but also owns one multifamily property that Chee said the company was still evaluating what to do with.
Mihalka said it is easier to convert industrial buildings into creative office spaces than it is with traditional high-rise buildings.
“If you have a traditional high-rise in the financial district of downtown, you can’t manufacture a creative office conversion. It’s unlikely to happen,” she said.
Industrial buildings, meanwhile, have direct access and do not have other traditional users already in the building or area, meaning that developers working on conversions can better curate the tenant roster and amenities.
Redcar does not have plans to expand outside of L.A. and Austin at the moment, but plans to expand its current footprint.
“Our primary focus will always be on buying older industrial buildings in L.A. to repurpose into creative space. In addition, we will also continue to expand in Austin and the multifamily sector,” Che said.