With more than 16 million Americans today residing within two miles (3.2 km) of their city hall, the recent revival of downtown living may be most obvious in the form of newly built luxury residential high rises appearing in so many cities. A less-noticed dimension of the downtown housing story over the past several years has been an increasing number of conversions of older office buildings into apartments and condominiums that serve a wider swath of the housing market. The underlying fundamentals suggest that this trend has more room to run, although—as with so much in real estate—the specific local context and the availability of public incentives will define the development opportunities.
Office-to-residential conversions are not new. In the mid-1990s, New York City made a concerted and highly successful effort to revitalize lower Manhattan through the approach at a time when 25 percent of the area’s 100 million square feet (9.3 million sq m) of space was vacant. (Around the same time, a developer named Donald Trump touted his remake of the Gulf+Western Building on Columbus Circle into Trump International Hotel and Tower as the first conversion of a modern high-rise office building to residential use.)
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The 1996 conversions of the Chicago Motor Club and the Singer Building into condominiums—the first nonrental housing developed inside Chicago’s Loop in a century—spurred nearly 30 similar redevelopments during the two-decade administration of Mayor Richard M. Daley. Over the past 25 years, Philadelphia has seen some 7 million square feet (650,000 sq m) of office space—more than 10 percent of the city’s inventory—transformed into housing and hotels, according to JLL. A similar scenario has played out over the same period in Boston and San Francisco.
More recent, and still unfolding, is the spread of this quintessential type of urban adaptive use to a wider group of cities away from the coasts and for a broader range of residential end users. A 2015 report by CoStar, a Washington, D.C.–based commercial real estate market intelligence firm, found that almost half the top office central business district markets in the United States were experiencing significant office-to-residential conversions, with the potential to create roughly 11,500 new residential units in those cities. While activity remains strong in the larger markets, CoStar noted significant upticks in cities such as Cleveland, Dallas, Milwaukee, Kansas City, and St. Louis. Local analysts have also noted record levels of activity in Baltimore; Cincinnati; Richmond, Virginia; Rochester, New York; and Minneapolis/St. Paul, among others.
Three recently completed U.S. projects reflect the variety of product types coming on line in these newer converts to conversions.
Market-rate rental and mixed-use projects: Mercantile Place is a rental apartment community targeted to upscale younger workers and empty nesters in downtown Dallas that consists of four buildings with a total of 704 apartments. Two of the apartment properties are converted office buildings, one of which was historic. The project also includes four restaurants at street level. Forest City Texas used tax increment financing from the city of Dallas to develop the project as part of a broader effort to renovate older buildings and bring more housing to downtown. Rents range from just under $1,000 to nearly $4,000 per month for units measuring 1,000 to 1,200 square feet (93 to 112 sq m).
High-end condos: The Oronoco is a 60-unit, LEED-certified luxury condo building on the waterfront in Old Town Alexandria, Virginia, across the Potomac River from Washington, D.C. The building formerly held offices for the Sheet Metal Workers International Association. The single-level units range in size from 1,549 square feet (144 sq m) to just over 3,511 square feet (326 sq m) and currently sell for $1.5 million to $4 million. All units offer exterior balconies or terraces, with some being over 1,000 square feet (93 sq m). The developer, EYA, left much of the U-shaped base structure in place and built only about half as many units as it could have by right, in an effort to target the high end of the market with larger units. The U-shaped base structure also provided an opportunity to create a central courtyard in the building while creating river views from nonriverfront units. Although part of the existing garage was sacrificed for a gym, a yoga room, a dog-washing station, community rooms, and private storage spaces, every unit still has at least two reserved parking spaces.
Workforce/affordable: The Century Building, a 12-story, 80,000-square-foot (7,400 sq m) former office building in the heart of Pittsburgh’s Cultural District, was redeveloped by TREK Development Group to provide 60 workforce and affordable apartments serving households earning 60 to 120 percent of the area median income. The project used an array of funding from local public agencies, federal low-income housing tax credits, and investments from the Pittsburgh Cultural Trust, the Heinz Endowment, and the Richard King Mellon Foundation. The development won a 2012 ULI Jack Kemp Workforce Housing Models of Excellence Award as a national model.
By no means is the trend limited to the United States. In 2015, Mayor Anne Hidalgo of Paris announced a plan to convert 2.7 million square feet (251,000 sq m) of office space to housing by 2020 as a way to provide more affordable housing and increase social diversity in the city. Also last year, the U.K. government permanently authorized a program launched as a pilot in 2013 that incentivized local approval of more than 4,000 building conversions in barely more than a year. In Australia, the central business districts of Sydney, Melbourne, and Brisbane are expected to see the removal of more than 4 million aggregate square feet (372,000 sq m) of office space by 2018, 80 percent of which will be converted to residential and hotel uses, according to global consulting firm Knight Frank.
The drivers of the current “boardroom to bedroom” boomlet are two trends familiar to readers of Urban Land: an increased demand for urban living, including downtown living, and an evolution in what workers and companies want in their office space. Between 2000 and 2010, U.S. metropolitan areas with 5 million or more people experienced double-digit population growth in their downtowns, more than double the rate of their overall metro area, according to the U.S. Census Bureau. Among the downtowns that saw the largest increases were Chicago (46 percent), Miami (28 percent), Sacramento (19 percent), and Seattle (13 percent). Even cities that lost population in their downtown areas, such as Baltimore and Toledo, Ohio, have seen growth in office-to-housing conversions.
Meanwhile, a host of factors remaking office space, including innovations in technology, increases in telecommuting, and preferences for more flexible and collaborative spaces, have made many older office buildings less competitive in their markets and, in some cases, obsolete. Even as central business district office markets have, for the most part, gradually improved over the past few years, demand for older office properties inside and outside downtown areas has been sluggish to nonexistent in a number of cities.
In this context, office-to-residential conversions are typically seen as an unmitigated win/win situation for cities. They help attract and accommodate new residents, often in a more environmentally sustainable manner than new construction, while reducing office vacancies—and sometimes saving beloved buildings from a more radical makeover, or even the wrecking ball.
The recent spread of conversions to smaller cities with substantial concentrations of older office properties that are simply no longer competitive in their original form bears out the double-bottom-line benefits.
Real estate markets are rarely, if ever, in perfect equilibrium, though, and a sustained high rate of office-to-residential conversions can create challenges for the attraction and retention of local businesses. That is because while it is often true that the older Class B and Class C office spaces that are most prime for conversions to housing no longer represent the kinds of properties that Class A office tenants desire nowadays, older office space with historical or simply quirky characteristics, as well as cheaper rents, may be what smaller firms most want and can best afford.
The Commercial Real Estate Competitiveness Study, released in the final weeks of New York City Mayor Michael Bloomberg’s administration in 2013, warned that the loss of lower-priced office space in Manhattan, primarily due to housing and hotel conversions, could create a shortage of space available and affordable to the city’s high-growth companies as soon as 2018, forcing some to consider alternative office markets. A tighter office market will presumedly push rents upward and reduce developers’ incentives to convert older properties, but those higher rents may be out of reach for some firms. A 2015 CBRE analysis of the aforementioned U.K. pilot program concluded that in tight submarkets for office space, residential conversions could result in losses of the affordable office space, a least in the short term.
It appears that in order for both office and residential markets to benefit fully from widespread conversions, local real estate market fundamentals need to pass the “Goldilocks test”: there needs to be just the right amount of excess older office space in the market for it to be able to withstand having that space redeveloped into housing (or hotel use) to meet real residential demand, without pricing out the full range of businesses necessary for the local economy to thrive. Ultimately, developers will attempt to build or convert to whatever use generates the highest rents, and over time the market will respond. Office-to-residential conversions will ebb and flow with the broader evolutions of local real estate markets.
The underlying fundamentals certainly suggest that conversions will continue, if not increase, in the near term. Most forecasters see strong demand for urban multifamily living in the United States and larger European and Asian markets even as recent levels of historic high-end rent growth moderate in some of those markets. At the same time, the costs of land and development in downtown cores will continue to create hurdles for new development. And a lot of office space remains available: 185 million square feet (17 million sq m) in the United States is obsolete and ready for reuse and as much as 300 million square feet (28 million sq m) may not be competitive in their local markets, according to the National Association of Real Estate Managers.
That said, the following factors probably need to be in place in any city that expects to see conversions at a significant scale.
A partner in the public sector. Many, if not most, office-to-residential conversions depend on local tax abatements, state and/or federal historic tax credits, and, in the case of affordable housing developments, federal low-income housing tax credits. Tellingly, some of the cities seeing a spurt in redevelopment are following the lead of New York City and Chicago two decades before in establishing conversions as a local policy priority. Mercantile Place, for example, may not have happened had the city of Dallas not created a tax increment financing district around the site as part of a focused strategy to attract residential development downtown. Baltimore developers struggled to get conversion deals to pencil out, even with strong market demand and substantial available inventory, until the city enacted targeted tax incentives for redevelopment in 2013. The story is similar almost anywhere conversions are happening on more than a one-off basis.
Optimal obsolescence. Not every old office structure is a residential building in waiting. Some older properties with unused by-right density will be more economical to tear down and replace with new construction than to be rehabilitated as housing. Others lacking that economic option will be too costly to remake as housing, even with public incentives. Some office floor plates will just be too wide, such as typical post-1970 construction with large central heating, venting, and air-conditioning systems, to enable even the most inventive architects to create appealing apartment floor plans that capture sufficient natural light for residents. And some buildings that might make sense in terms of the pro forma and renderings may not be located in a part of town that is ready to meet the wants and needs of dozens or even hundreds of new full-time residents.
A welcoming neighborhood. Most office-to-residential conversions are happening in and around urban cores with considerable preexisting density. Fewer examples of conversions are to be found in lower-density submarkets and suburban areas, even though many are plagued by high office vacancy rates and unmarketable office locations. Anecdotal evidence suggests that a primary obstacle in primarily residential urban and suburban communities is strong resistance to higher residential densities. The controversy over a proposed conversion of a vacant 47-acre (19 ha) office park in Upper Saddle River, New Jersey—one of the most affluent communities in that state—was reported in February of this year in the Wall Street Journal and other U.S. business press outlets as being emblematic of this phenomenon. Town residents overwhelmingly opposed the developer’s original high-density multifamily housing plan. However, local officials recently approved a much less dense program, consisting primarily of luxury townhouses.
Of course, what comes next in the long running and currently growing trend of office-to-residential conversions will not be solely determined by demographic, economic, and community considerations. The ability of developers and owners to innovate will influence the new direction as well. Consider the WeLive Apartments concept from the coworking firm WeWork. The scheme combines in a single property the company’s creative approach to shared office space with new flavors of cohousing in high-end micro apartments with lots of amenities; some of the residents also work in the building. The first two WeLive properties to come on line—in New York City’s Financial District/Wall Street and in the Crystal City neighborhood of Arlington County, Virginia (just across the Potomac River from Washington, D.C.)—are conversions of older office buildings. Fast Company reports suggest that WeWork sees WeLive as central to its growth strategy, projected to account for more than 20 percent of the company’s 2018 revenue. That the six-year-old startup company, valued at about $10 billion based on a business model designed to disrupt the commercial office market, is already considering alternative and additional uses of office buildings is a contemporary reminder that conversions will always be relevant in urban real estate.
Stockton Williams is executive director of the ULI Terwilliger Center for Housing.