OpinionJust look at why it’s so hard to turn offices into homes
Across America, once-busy downtowns are lifeless, studded with too many empty, outdated office towers. Reinventing urban cores will require converting these properties into new uses such as housing, schools or art centers — on a large scale. This year is on track to reach a record of nearly 100 office towers remade nationwide. But much more progress is needed.
Most major cities have about 20 percent of their office space vacant and only about 2 percent currently undergoing a conversion, according to real estate firm CBRE. Cities need a conversion boom to help cut vacancy rates in half, a level that would stabilize property markets and re-create a feeling of pre-pandemic vibrancy. Right now, the challenges facing developers — financial and architectural — are too often prohibitive.
It’s hard to do a conversion. Office buildings weren’t constructed to be lived in.
They don’t have the plumbing and electrical guts that homes require. Ceilings need to be high enough that these additions won’t drop them below regulation height, which is typically at least seven feet.
There’s also the issue of windows. If the building is very wide, apartments or rooms near the center won’t have any.
Buildings with inner courtyards or other shapes that allow for all areas to have natural light are better suited for conversion.
Some older offices are also good candidates. Built before central heating and cooling systems, they were constructed from the outset to maximize window access and air flow.
Location matters, too. Zoning laws mean some buildings have no parking — or too much — or can’t legally be converted into homes.
And well-placed windows won’t matter much if they’re blocked by neighboring buildings.
Even if building suitability were not an issue, the financial challenges are daunting. Developers are hesitant to take loans with mortgage rates at a 20-year high. Banks are wary of financing new projects. But the largest hurdle is that office towers remain too expensive. The market has changed post-pandemic, but many sellers aren’t prepared to slash prices enough — or to take a loss.
Cleveland is leading the way in office conversions largely because building prices were already cheap after years of underutilization. Other big cities haven’t seen this level of vacancies in a long time, if ever. Would-be buyers of office property are waiting for better deals. They expect tumbling prices in 2024, as sellers get desperate.
There are early signs of this. The former Union Bank building in downtown San Francisco just sold for $61 million, about a quarter of its initial asking price. In Boston, One Liberty Square just sold for $45 million, which is almost 20 percent less than it sold for a decade ago. In D.C., eyes are on the downtown office formerly occupied by law firm Williams & Connolly. It’s in a prime location on top of Metro Center and right by the White House. Gensler architects rated it as a top conversion candidate. The problem? The owner refinanced the loan on the building for $135 million in 2016. Numerous developers told us that a conversion doesn’t make sense anywhere near that amount. The owner effectively handed the building back to the lender a year ago. It lingered on the market and just went under contract. The price has yet to be disclosed, but it will no doubt set a new — lower — price benchmark for downtown D.C. offices.
City leaders need to be ready. As cities reshape their cores, three steps speed up the metamorphosis. Step 1 is offering financial incentives to transform vacant offices. Step 2 is expediting the permit and zoning process. Step 3 is creating a “one-stop shop” at City Hall to handle conversions.
No one wants to give money to developers to encourage them to make investments they would have made anyway, as building prices declined. But city officials have to weigh this risk against the urgent need to reinvigorate downtowns before they enter a spiral of blight, crime and underinvestment. If the transition does not happen soon, it might not happen at all. Already, property taxes are plunging as building owners demand lower bills, and it’s projected to get worse. Some developers will buy up buildings as property values fall, but their actions are unlikely to be anywhere near the scale needed to revitalize downtowns. It’s better to front-load financial incentives to spur momentum.
Several large cities are giving developers tax breaks if they convert offices into apartments. Philadelphia introduced in the late 1990s a 10-year tax write-off that spurred a massive downtown building — and population — boom. More recently, Calgary, Alberta — widely considered a model for office conversions — has committed about $150 million (200 million Canadian dollars) in grants. D.C. just enacted a 20-year tax abatement, but it’s capped at a low level in the next few years. Boston is piloting a 29-year version. San Francisco does not have a major incentive in place yet for office transformations.
Zoning is another hurdle. Most building codes are written for new construction. Conversions require ingenuity. Each project needs a slightly different exemption to make it work. Sometimes it’s as simple as automatically allowing residential buildings in a commercial area. In other cases, developers need exemptions on the amount of parking spots, open space or where front doors can be located. City bureaucracies aren’t set up to quickly handle one-off requests. That’s why it’s critical to have a central point of contact for conversions.
New York City recently unveiled an Office Conversion Accelerator group to be the main contact on office-to-housing conversion projects. Calgary has a similar Downtown Strategy office that maintains weekly contact with developers and ensures permits are issued in about a month. Chicago took a different approach by focusing its efforts on specific area: LaSalle Street Reimagined. The targeted approach enabled Chicago to quickly approve projects and financing, with a goal of maximizing affordable housing agreed to ahead of time. Chicago has committed about $300 million in special financing to the redevelopment.
City officials have the right vision: creating a “24/7” downtown with a better mix of offices, entertainment and homes. But the scale of transformation means city leaders have to think bigger than they are now. Cities that tiptoe won’t get a boom.