Pictured: Bill Abramowitz, Portfolio Manager & Chad Phillips, Global Head of Workplace, Retail & Mixed-Use
While the majority of corporate America struggles to entice workers back to the workplace, Nuveen Real Estate sees an incredible opportunity in the alternative workplace sector, which includes medical office, life science, technology R&D, studio production space, and mixed-use.
As early adopters—Nuveen Real Estate first invested in life sciences in 2015 and was one of the largest buyers of medical offices in 2021—the firm has built a strong portfolio in the space and believes it will be a high-performing sector in the near future and beyond. “We had this thesis in place even pre-pandemic and have broadly pivoted into these subcategories from more traditional office allocations,” says Bill Abramowitz, portfolio manager for Nuveen Real Estate’s Workplace sector.
We think, given the demand drivers in these subsectors, it’s the right mix of assets for the long term. They have complementary attributes and should also be more resilient, with expanding potential going forward, than the more traditional commodity office asset class.
Demographic trends provide tailwinds to alternative office subsector
Three key themes support this play, says Chad Phillips, Nuveen Real Estate’s Global Head of Workplace, Retail & Mixed-Use, as he described common elements across these subcategories. First, they all have attractive long-term demand characteristics based on the macroeconomic drivers of healthcare, innovation and technology, which comprise a significant slice of Gross Domestic Product (GDP). As an example, healthcare alone accounts for nearly 20% of GDP, with no slowdown in sight, and receives significant public and private sector investment. Studio production is another thriving subsector as demand for streaming content continues to increase.
Another shared attribute, despite the fact these subsectors perform widely different roles, is a mission-critical nature that requires a physical presence.
“As such, they’re incredibly resilient to work-from-home trends, which wasn’t even on our radar when we first pursued this focus,” says Abramowitz. “As the pandemic unfolded, we considered how our strategy would perform in the world and realized that these resilient subsectors were even more attractive. Over the past few years, these workplaces have had usage levels far beyond what the traditional office market has seen.”
Portfolio Asset – 5500 Jefferson, Los Angeles, CA
Finally, the third commonality is they typically entail deep investments from the tenant in order to perform this specialized work. That makes it more challenging to move to another space, leading to high renewal rates. As one example, Nuveen bought an asset in Culver City, California, one of the top five technology and creative markets in the country, where approximately three-quarters of the space has been built out into R&D exploration rooms, with the remainder as supporting modern offices. “It’s an example of an asset that underpins our strategy as a workplace environment that’s not an office building,” Abramowitz explains. In another example, he mentions a life science facility whose physical premises is certified by the FDA and other organizations. These certifications add additional security and longevity to in-place tenants.
“We believe our alternative strategy is the future of where general office investing is headed, and we have been actively repositioning our portfolio toward that,” Abramowitz says. “Overall demand generators and dynamics behind these industries are very strong as we look into 2023 and beyond.”
Portfolio Asset – 5500 Jefferson, Los Angeles, CA
Phillips adds that while part of Nuveen’s portfolio still consists of traditional office space, they are future-proofing those buildings to create inviting places that attract tenants through retrofitting and other advances. “There are going to be winners and losers in the alternative office sector, and we believe we’ll be on the winning side of that equation,” Phillips says.
Nuveen’s competitive advantages lead to success
One of the factors that makes Nuveen stand out is its fully integrated platform, combined with a deep bench of talent situated in the right markets. For example, the studio production assets are primarily located in Los Angeles, where Nuveen has extensive relationships and a comprehensive understanding of the market dynamics and players, which allows them to nimbly implement their strategy.
With our sector specialist model, we have people waking up every day thinking about the same thing and executing similar deals, in contrast to our peers with a generalist model where they might be simultaneously thinking about a retail deal in New York City and a multifamily project in Boston, Abramowitz says. With that focused expertise, you excel at what you’re doing so you can outperform on behalf of your clients.
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Even though Nuveen Real Estate is a relatively large firm, Phillips appreciates that team members are still encouraged to be entrepreneurial, a commitment that starts at the top. “When we first proposed balancing traditional with alternative office, retail and mixed- use, it was a strategy that was certainly outside of the box, yet they embraced it and advocated for the pursuit of this new direction,” Phillips says.
On that note, the firm is also progressive as it relates to environmental, social and governance (ESG) initiatives. For example, the firm recently invested in an office building outside of Dallas that’s 100% electric, powered largely by wind energy.
“While ESG used to be a less critical factor, now employees and tenants want to partner with someone who shares their priorities, and they are increasingly interested in your credentials,” Phillips says. We benchmark against peer buildings and always aim to be better than our competition.”
In addition, Phillips points to the substantial capital infusions Nuveen Real Estate makes into its existing portfolio. The firm is proud of extensive improvements, that include adding smart technology, renovating lobbies, upgrading air filtration and more. “We’ve been a very active landlord with the intent to prioritize renovations and improvements across all our portfolios.”
A bright future with expanding opportunities
Abramowitz sees rising inflation and interest rates fueling broad repricing across all asset types, including those that have recently been the strongest sectors, such as multifamily and industrial. “While we won’t be immune, the fundamentals underlying the industries at the core of our strategy have very strong demand drivers and tailwinds behind them. We see them as a great play for a long-term investment, with considerable capital still flowing into these sectors.”
“We have dry powder and are ready take to advantage of the repricing that’s currently occurring, which we believe will lead to a strong vintage for investments made in 2023,” adds Phillips. “At the end of the day, as a real estate investor, you’re always looking for opportunities. We want to make sure we have our compass pointed in the right direction where we know there will be long-term demand and growth. Combine that with our excellent execution capabilities and Nuveen Real Estate offers a compelling overall package.”
Alternative workplaces are just one area where Nuveen Real Estate is finding innovative opportunities, learn more about their real estate capabilities here.