Empty offices have become a ubiquitous part of office markets across the country, as workers continue to work outside the office and companies cut back their footprint or go to hybrid models. The biggest and most persistent question the real estate industry has been asking over the last three years is getting some answers. What will happen to the office? For many struggling properties, they will be converted into another use. Conversions can end up being simple or complicated, and they don’t always make sense for every building depending on a number of factors, like location, floor plate sizes, and zoning restrictions. But in cities around the country, empty offices are getting new life as rental apartments, distribution centers, and even schools.
Much-needed housing
Conversions, while much-talked about as a solution to an increasing number of empty offices, don’t happen on a large scale, but the numbers are rising. In 2021, more than 20,000 apartment units were created in conversions, almost double the number of apartments converted in 2020 and 2019 combined, according to RentCafe. Of those conversions, 41 percent were former office buildings. Officials in cities like Washington, D.C., Boston, and Calgary are rolling out incentive programs to help streamline these kinds of conversions.
In Manhattan, office-to-residential conversions are nothing new. Many high-rise office towers in the Financial District were repurposed as residential buildings in the years after the 9/11 attacks. Those buildings, most of which were built in the 1920s, checked all the boxes for conversions: smaller floorplates, designs allowing more light, and a city rezoning and subsidies that allowed those kinds of conversions. Today, two notable office-to-residential conversions are taking place in the neighborhood. Billionaire developer Harry Macklowe is converting One Wall Street, an Art Deco office tower originally completed in 1931, into a luxury condo building. It’s the largest office-to-residential conversion in New York City’s history and is expected to cost more than $1 billion.
Just around the corner, Silverstein Properties and Metro Loft are in the process of converting 55 Broad Street, a 30-story office tower built in the mid-1960s, into a luxury rental building. Architecture firm CetraRuddy is designing the new building, which will have 571 apartments ranging in size from studios to three bedrooms. Nathan Berman, the founder of development firm Metro Loft, said the conversion is the “right evolution” for older, underperforming office properties and will cost about a third less than a ground-up development at the site.
In Downtown Dallas, several office properties built in the 1980s or before are set to be converted into residential. One of those is the Santander Tower, formerly known as the Thanksgiving Tower, an iconic part of the city’s skyline that was once Dallas’ second-tallest building when it opened in the early 1980s. The conversion will keep some office space but add 228 apartments at the 50-story tower as well as amenities like a pool, dog park, and gym. Dan Harris, a managing director at commercial real estate firm Stream Realty Partners, wrote in a recent op-ed that between 2 and 3 million square feet in Downtown Dallas will be converted into high-rise apartment towers. “With record high vacancy (over 33 percent in the core of downtown) and record low multifamily vacancy (less than 2 percent), this looks to be a winning formula,” Harris said.
The apartments will be a welcome addition to the city, which is currently one of the top places where young people are moving and has an incredibly high demand for housing. Developers are trying to keep up: the city has one of the largest multifamily development pipelines in the country. In nearby Fort Worth, the multifamily market currently has $2 billion worth of residential development on the way.
In California, where steep housing costs have led to a homelessness crisis in many areas of the state, office-to-residential conversions got a recent boost from the state legislature in the form of $400 million in subsidies to convert offices into affordable housing. The strategy is garnering interest in Los Angeles, where more landlords are converting office properties into apartments as demand for office space lags. Los Angeles-based real estate firm Jamison Services, a division of Jamison Properties, Koreatown’s largest commercial landlord, owns several office properties in downtown LA and has been busy converting some into rental apartments. The company’s latest project aims to repurpose 170,000 square feet of office space at a 13-story office building in Koreatown into 176 apartments. While the top floors will be turned into residential space, the bottom floor will be designated for retail space.
Conversions are also gaining major steam in Minneapolis, which has an office vacancy rate of around 30 percent at the moment, according to Cushman & Wakefield. Several office-to-residential conversions are taking place, one of which is Minneapolis-based developer Sherman Associates’ plan to convert Northstar Center East, a 13-story office building in downtown Minneapolis with close to 300,000 square feet, into a 216-unit apartment building that will include affordable apartments.
Industrial and beyond
There may be less need for physical office space these days, but there is a continued and growing need for space for all the stuff people are buying online. As e-commerce has soared over the last several years, and especially throughout the pandemic, demand for warehouse and distribution space has skyrocketed. In both urban and suburban areas, industrial developers are looking at converting older office properties into industrial space or, in some cases, starting from scratch altogether.
Alex Kachris, the Northeast Industrial Research Manager for JLL, told me that he’s been seeing more suburban office properties built in the 1970s and 1980s in less desirable areas getting knocked down and replaced with industrial facilities. Even in dense urban areas like New York City, Kachris has seen conversions of office to industrial. “There are opportunities in those areas where an office, loft-type space could be used for warehouse space, we’ve seen that successfully done,” he said. “But it’s not catering to the widest user group.”
Converting an office building to an industrial facility can be a big success with the right conditions. But developers are faced with similar obstacles that come up with office-to-residential projects, including zoning, permitting, and approval issues. The best candidates are completely empty or single-tenant buildings that are within 5 miles of a major highway, according to NAIOP. Class B and C office buildings typically make the best case for conversion and should be on a site with between 8 and 35 acres. Logistics giant Prologis looked at office-to-logistics conversions in a report released earlier this year. In its analysis, the company estimated that between 40 and 80 million square feet of office space will be converted into logistics properties over the next 10 years.
Office-to-logistics conversions make sense in areas that have all the factors industrial users are looking for: suburban areas close to airports and major thoroughfares. In the Los Angeles area, Brookfield Properties recently acquired a two-story office building with 125,000 square feet near the Port of Los Angeles, a key logistics hub. The company is exploring turning the property into a logistics facility. In suburban New Jersey, a joint venture of EverWest Real Estate Investors and Woodmont Properties purchased an office building with more than 350,000 square feet along with an adjacent land site, with plans to tear down the building and build two warehouse and distribution buildings with close to 430,000 square feet.
Another New Jersey conversion has an interesting history. An undisclosed buyer recently acquired Party’s City’s headquarters in Rockaway, NJ, with plans to convert the property to an industrial facility. The building originally started as a warehouse, was eventually converted to corporate office property, and is now returning to its original configuration as a warehouse.
Aside from the most common conversions of office to residential and industrial, after offices emptied out earlier in the pandemic, a number of startup companies began repurposing unused office space into storage, small gyms, co-working space, and even micro-schools. Though relatively rare, office buildings have been converted into schools in recent years. In the Washington, D.C. suburb of Alexandria, Virginia, a five-story office building built in 1983 was converted into a private high school, and in California’s Bay Area, an empty office building was turned into the new home for a private school as well. The architecture firm behind that conversion said this kind of adaptive reuse is more economical and can especially benefit startup schools. “Real estate is the barrier to entry,” said architect Danish Kurani. So by being able to take what’s there and make the most of it, you really give these types of programs a chance to get off the ground.”
Repurposing office buildings into apartments, warehouses, self-storage, and even schools can be a win for landlords and a boost to the surrounding neighborhood. More cities with high office vacancy rates, like Washington, D.C., are launching incentive programs to help owners and developers make the transition. But it is still a niche strategy in the real estate industry that is constrained by a number of factors, including regulatory barriers, construction costs, and simply not having the right infrastructure to support a major change. However, we can expect to see more conversions, and if cities continue to get on board to help encourage and streamline the process, the numbers could rise even more. And as the industry has proved in recent years, and especially during the last few, getting creative with conversions can pay off in the long run, so it’s anyone’s guess what empty offices will become next.
