In cities across the country, the downtown landscape has changed in recent years. The rise in remote work and hybrid schedules during the pandemic has left office space vacant and sidewalks sparse. One metric published by commercial security provider Kastle, derived from its customer data, puts current office occupancy rates around 50% based on a 10-city average that includes Chicago, New York, Houston, Dallas and Los Angeles.
The issue is spurring city governments to collaborate with commercial real estate professionals, building owners, residential developers and lenders to think creatively about how to reinvigorate downtown areas. As one possible remedy to address both empty office buildings and a need for more housing, a growing number of cities are exploring office-to-residential conversions, especially for older buildings that are less appealing to current corporate tenants’ needs, experts say.
“Office vacancies across the United States and return-to-office conversions have highlighted the flight to quality,” says Sheila Botting, principal and president, Americas, professional services at commercial real estate advisory firm Avison Young. “As tenants shift up in the marketplace, there will be some assets left behind. This provides owners with a great opportunity to reevaluate their asset strategy: Should they stay as is, innovate or repurpose?”
Office-to-residential on the rise
Some adaptive reuse projects are already complete, and many more are in the works. According to statistics from RentCafe, office-to-apartment conversions are up 25% from pre-pandemic levels, with Washington, D.C., Philadelphia and Chicago leading the way, and 77,000 apartments are presently under conversion.
Current projects around the country include the 51-story First National Bank Tower in Dallas, which is now a mixed-use property featuring several restaurants, a hotel, offices and 324 upscale apartments, whose first phase opened in 2020. Also in Dallas, the Energy Plaza skyscraper is being converted to 293 luxury apartments and updated office space. In Houston, two projects in the works are the conversions of the 1927 Niels Esperson building and a 1960s-era office building. And in Phoenix, the former BMO Harris bank building is being converted to 140 luxury apartments with top-of-the-line amenities.
Chicago is among the cities at the forefront of adaptive reuse efforts, but empty office space and a housing shortage aren’t the only motivating factors. With property tax revenue heavily reliant on commercial real estate, the city has good reason to diversify and strengthen its tax base through office-to-residential conversion, according to research by nonprofit public policy organization The Brookings Institute.
With the LaSalle Reimagined initiative, Chicago hopes to transform the office-dominated LaSalle Street corridor in the Loop into a mixed-income residential neighborhood with community amenities. In March, the city selected five proposals for predominantly historic office buildings to be converted to more than 2,000 units of housing, including more than 600 affordable units. The projects, collectively representing almost $1 billion in total investments, will receive financial assistance from the city. At a recent news conference, city representatives described the project as the largest affordable housing commitment downtown and one of the largest office-to-residential conversions in the country.
One of the proposals selected to receive financial support from the city, submitted by family-owned real estate developer Golub & Co. and American General Life Insurance Co., is for 30 N. LaSalle St., a 371,640-square-foot high-rise built in 1975. The plan creates 349 studio, one-bedroom and two-bedroom units, including 105 affordable units. “The first 18 floors are going to be residential, and then 19 and above is all office,” says Lee Golub, executive vice president of Golub & Co. In addition, the plan delivers coveted outdoor space for residents. “The building is set back far from the property line so we can cantilever out to create a beautiful indoor-outdoor amenity space,” Golub says.
Atlanta is also exploring adaptive reuse as a solution to tackle a decline in needs for older Class C office stock downtown, coupled with significant population growth throughout the metro area, according to Josh Humphries, senior advisor for housing to Atlanta Mayor Andre Dickens. “One of our core goals is to create or preserve 20,000 affordable housing units in the city and, more broadly, to help create a healthier housing market so that people across all incomes can afford to live in the city,” Humphries says. “We think that adding new housing downtown will make the whole city work better by putting housing where existing infrastructure and density makes sense for it to happen.”
To that end, the city’s economic development agency, Invest Atlanta, recently purchased 2 Peachtree St., built in 1966, from the state of Georgia with the intent to hold the property as a real estate asset until a redevelopment partner is selected. “It’s going to be the largest office-to-residential conversion that’s ever been done in the Southeast,” Humphries says. “It’s 40-plus stories and almost one million square feet.”
Pros and cons of conversion
While it may seem that office-to-residential conversion is the magic bullet to revitalizing downtowns and fixing the housing shortage, experts point out that there are some key challenges to consider. “A lot of things have to come into play from a physical standpoint to even think about doing a conversion,” Golub says. “The idea that we’re going to convert, convert, convert sounds good on a general basis, but physically making it happen and making the numbers work is very difficult. The cost to renovate is either the same amount to build new or just a penny or two less, because you’re basically demolishing almost everything inside the building.”
According to Stephen Silverstein, principal and managing director, U.S. Studio, project and construction management at Avison Young, converting buildings from one function to another invariably requires significant engineering and building performance considerations.
“For instance, new plumbing systems could require incorporating a completely new infrastructure, and stripping a building back to its skeleton and rebuilding could potentially be problematic,” Silverstein says. “Developers would need the stars to align to ensure that the envelope, floor plate, building systems and other building components are readily adaptable. Conversions aren’t nearly as predictable as new-builds.”
In addition, many office buildings are not well suited to conversion in the first place, Golub explains. For example, the depth of the floor plate, windowsill height, ceiling height and elevator access all need to be taken into consideration. “There are some basic things you need to have in an office building to even think about whether it could work for residential, and then it gets back into the numbers,” he says.
The reality, Golub says, is that many office-to-residential conversion plans that incorporate affordable housing aren’t practical without gaining significant financial and legislative support from cities. While Golub & Co. recently completed the conversion of Chicago’s historic Tribune Tower into residential, Golub points out that the units are high-end condos, not affordable rentals, so the capital structure is different. “The numbers typically don’t work unless you have some kind of public-private partnership and subsidy,” he says.
Atlanta, for one, has been working with Central Atlanta Progress on a study to determine not only which buildings in the city could make sense for conversion, but also the legislative and financial requirements — including potential changes to building codes and zoning laws, as well as tax incentives that promote affordability. “We know that we’ve got to build the right kind of incentive package and make sure that all of our regulatory tools are aligned so that we can see more private-market conversions,” Humphries says.
One advantage for 2 Peachtree is that the building is just over 50 years old and now eligible for historic tax credits. The same applies to many other midcentury buildings across the U.S.
While the financial, logistical and legislative hurdles associated with conversion are daunting, Humphries points out that adaptive reuse benefits cities beyond creating more housing and reinvigorating downtown areas; it’s also a more environmentally sustainable option to tearing down old structures and building new. “Reducing our carbon footprint and thinking creatively about how we can save existing building stock is a first priority now,” he says.
A creative approach
Avison Young recently undertook a research project using proprietary and third-party data to explore the potential for office-to-residential conversions in 10 major U.S. markets, including Manhattan, Chicago, Los Angeles, Atlanta and Houston. After considering nearly 20,000 buildings built before 1990 with floor plates below 15,000 square feet, Avison Young determined that adaptive reuse could be a solution for as many as 6,206 properties. More work is needed, however, to verify feasibility in areas including location, infrastructure, floorplate, construction costs and financing.
“Clearly, not all properties will make the cut,” Botting says. “Our goal is simply to launch the conversation toward revitalizing and re-imagining our downtowns in a post-pandemic world.”
With so many challenges to consider, some cities are taking a cautious approach to adaptive reuse, evaluating the possibilities before launching full-scale initiatives. In Seattle, the Office of Planning & Community Development recently held a competition to elicit creative conversion ideas. Twelve teams, composed predominantly of architects with contractors or building owners, submitted project proposals, and the winners were announced in June.
First place went to a proposal for the Mutual Life Building, a well-known downtown structure built in 1895 that was commissioned by Henry Yesler, the owner of Seattle’s first mill. The proposal stood out for its emphasis on affordable housing, practical use of space and opportunities for flexible use in the future. The proposal entails converting the upper floors of the building to “co-living” spaces — 80 private sleeping rooms with shared amenities like kitchens and bathrooms — while maintaining office and commercial space on the ground floor and basement. To make the best use of the floor plate, the design places the bedrooms around the perimeter of the building for optimal natural light and the common spaces at the interior of the building, where less natural light is needed.
“Our goal was to try to rent units around 30% AMI (area median income), and in order to make the project affordable, you really have to cut costs by building less and by providing more units,” explains Gina Gage, an architect at Hybrid, the Seattle architecture firm on the proposal team. “Pairing the bathrooms, for example, reduces the amount of plumbing penetrations that you need.”
Minimizing the plumbing has another advantage beyond lowering construction costs, according to Gage, in that it makes reverting to office space in the future potentially easier and more affordable, should needs change. Indeed, the Mutual Life Building has already undergone a transformation from commercial to residential and back to commercial in its lifetime.
While the city of Seattle hasn’t committed to moving ahead with any of the winning proposals, Mayor Bruce Harrell spoke about his commitment to the prospect at the awards ceremony for the competition. “What’s next is we will convert many of these ideas into legislative and regulatory actions,” he said. “We’ll advance this based on this vision that you’re helping us form together — future legislation and regulatory modification to code changes and the permitting processes. We’ll have new incentives, and quite frankly, this will inform our budget.”
Ultimately, experts say, it will take a collaborative approach involving local governments, developers, architects and other stakeholders to determine when, or even if, adaptive reuse makes sense.
The Brookings Institute report, for one, stresses that office-to-residential conversions are only one potential remedy for ailing downtown areas in cities across the country. Optimism remains, however, that it’s a remedy worth pursuing.
“Adaptive reuse contributes to placemaking and revitalization and vibrancy of neighborhoods — exploring what’s possible in our cities,” Botting says. “We feel strongly that this practice can build vibrant communities, reanimate city blocks and diversify neighborhoods.”