R2 Cos. Buys 525 KSF Midwest Creative Office Portfolio

By Barbra Murray

The Tannery

R2 Cos. has expanded its footprint in Minneapolis and Milwaukee by half-a-million square feet in one fell swoop. The real estate investment firm acquired the Midwest Creative Office Portfolio, a group of properties totaling approximately 525,000 square feet, from Sara Investment Real Estate LLC in a transaction valued at approximately $60 million.

The Midwest Office Portfolio features 11 buildings, ranging from brick-and-timber warehouse facilities to post-industrial office structures. “These are unlike anything else that currently exists in Minneapolis and Milwaukee,” Max Meyers, principal & chief investment officer with R2 Cos., said in a prepared statement. “Creative office tenants demand non-commodity space. This is difficult to replicate in traditional office towers. This portfolio includes some of the most striking buildings in each of these markets.”

The Minneapolis segment of the Midwest Creative Office Portfolio encompasses two multi-structure campuses, The Crown Center and 1515 Central, totaling roughly 176,400 and 99,900 square feet, respectively. Located in the Northeast Arts District, the historic buildings are home to a host of tenants, including Tactile Medical, Anagram International, Object Partners, AON, Sociable Cider Werks, Bauhaus Brew Labs and Dogwood Coffee.

In Milwaukee, the Midwest Creative Office Portfolio features The Tannery, a 251,000-square-foot complex in the city’s Walker’s Point submarket. The tenant roster includes Advocate Aurora Health, which anchors the property.

R2 will capitalize on demand for creative office space in both metros through a renovation program that will include cosmetic upgrades, the modernization of mechanical systems and the addition of restaurants, cafés and other coveted amenities.

Look on the upside

All told, the Midwest Creative Office Portfolio is 95 percent leased, but the collection of office buildings offers more than a steady income stream. The portfolio provides upside potential, given that in-place rents are 40 percent below market-rate in Minneapolis and Milwaukee, where office rental rates continue on an upswing.

“Relentless economic growth and a landlord-favorable market,” are responsible for rising rates in Minneapolis, as are recent improvements at a handful of properties, per a third quarter 2018 report by commercial real estate services firm JLL. In Milwaukee, ongoing rent growth resulted in the highest rents in the market in the last two years, according to JLL.

R2, which acquired the Midwest Creative Office Portfolio through the first close of a new $150 million fund targeting creative office properties in the Midwest, will add the properties to its joint holdings with private investment firm Skydeck LLC. R2 and Skydeck’s previous joint venture purchases include Milwaukee’s 1.1 million-square-foot Main Post Office building, which R2 designated for an adaptive reuse plan immediately following the 2015 acquisition. The partners also acquired the 100,000-square-foot Keller Building in Minneapolis and the Morton Salt factory, a 150,000-square-foot facility in Chicago.

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