Loft Offices: Coming of Age
Do you remember back in 1980 when Elvis Costello, festooned in narrow leather tie and black Converse high-tops, was considered a counterculture punk? Fast forward thirty years and he is mainstream – married to jazz diva Diana Krall and hosting a variety show Friday nights on CBC. The commercial loft business has followed the same trajectory within a similar time frame.
In 1980 occupancy levels of Old Montreal and the Plateau buildings were beginning to show signs of the decline of the manufacturing sector as the first lines of imported garments found their way to our shores. Single story, multi-tenanted industrial properties with high ceilings and individual loading docks became the norm for the companies as they transitioned away from local production. The resulting change of business model led to substantial vacancy levels with no takers in site.
Through what, in retrospect seems to be divine providence, the demise of the old economy businesses dovetailed with the emergence of a nascent group of industries that have ultimately become the vanguard of Quebec’s new economy. Tenants seeking commercial loft space in the ‘80s were fashion designers, graphic artists, photographers and members of what is seen today as creative commerce. Their need to occupy loft buildings was not born from a desire to have cooler spaces featuring hardwood floors, exposed brick and open ceilings. The motivation was simple – cheap rents. The pioneers had spirit, creativity and ambition. What they lacked was money. The loft business developed as the only logical response to market conditions on upper level floors. There were no takers for large floor plates as manufacturing continued to dry up. The buildings were not situated in desirable areas for white collar companies. Had traditional office users been prepared to relocate to uncharted territory, the cost to convert loft space to standard office would render the decision impossible.
That was then; this is now. With the paradigm shift created by a new generation entering the business world, coupled with the rise in information and entertainment oriented businesses, what was once eschewed is now in fashion.
Significant change has come to the business model as it has become more mainstream. The notion of Live-Work-Live-Learn and Densification of the Urban Landscape are two dominant themes governing Montreal Real Estate needs. The most significant contribution to the change in the commercial loft model results from the type of developer now purchasing this asset class. Whereas commercial loft properties flew under the radar with regard to corporate acquisitions, such is no longer the case. Throughout North America loft properties form core holdings of several REITs and institutional buyers. Their appearance has altered the playing field dramatically. Two elements in particular have created a substantive shift in the commercial loft business. As highly capitalised companies enter the game, the return on investment that larger players accept has effectively squeezed the individual owner out of the market. Secondly, in the early days of commercial loft rentals, TI’s consisted of a bucket of paint handed to the new tenant. If they were deemed particularly credit worthy, they might get a brush, too. Today’s TI allowances are often commensurate with packages offered for traditional office space. Air conditioning did not exist in the early model. Windows that opened were desirable since fresh air blowing in off the mountain was sufficient. Today, sophisticated HVAC is considered base building and a lack of air conditioning is a non-starter, particularly as server rooms and computer generated heat becomes an important consideration.
The elevated consciousness of loft users has sped up the creation of green and LEED type buildings as tenants require recycled materials and energy efficiency in their buildings. No self-respecting loft building lacks a bicycle rack or Bixi access.
The niche for commercial loft users who reject the more corporate environments traditionally associated with the CBD continues to grow. Montreal has evolved a doughnut shaped environment when it comes to loft sectors and nodes. The south west, Griffentown, Le Plateau, Mile End, Rosemont/Petit Patrie have all become hotbeds of creativity as their old industrial buildings become recycled cradles of 21st century industries such as gaming, software and app development, on line services, design, etc. Look for growth in the Hochelaga-Maisonneuve, Villeray, Verdun, Pointe St. Charles and St. Henri corridor as this phenomenon continues to expand.
Typical leases are in the 1,000-5,000 square foot range. Many clients are coming out of their basements and loft space represents their first venture into the outside world.
To that end, the question of financing loft buildings poses a unique set of challenges. Most users are well below credit grade. At first blush one would think that typical lenders would shy away from mortgages supported by start ups, and small, non-traditional users. In actuality, a loft building should be presented as being similar, in terms of risk, to an apartment complex. Because of the relatively large number of tenants occupying a property, coupled with the fact that rarely does a tenant occupy more than ten percent of a building, the risk of default is significantly less than in a traditional office building filled by two or three lead tenants, the collapse of any of which could spell financial disaster to the borrower.
In the world of loft space, the greatest challenge is keeping up with the ongoing changes in user requirements of individual tenants. A start up can go from 1,000 square feet to 15,000 in two or three years. Conversely, a firm that has lost its mojo can let go three quarters of its staff overnight and shrink from 5,000 square feet to 500 in a matter of minutes. Elastic walls would make management easier but instead a greater attention need be paid to monitoring tenants activities. Changes in paying habits, increased hiring, need for additional electrical circuits or air conditioning can be a tip off as to what is to be expected in the near future. The proactive manager communicates regularly with their tenants with an eye toward being able to relocate and shuffle tenants on relatively short notice.
The commercial loft market is here to stay and is already segmenting itself into A, B, and C classes. More so than traditional buildings, the importance of social media via Facebook, Twitter, Linked In and others drive the demand for space. Staying ahead of the curve and paying attention to trends will allow the commercial loft building owner to keep his property full and help improve the dynamism of the local economy. Pump it up.