The following includes findings from RCLCO’s market feasibility work on the reuse of office buildings.
1. There is a premium for historic conversions. True.
A broad survey of residential buildings would suggest there is a discount for office buildings converted to residential use, and that might stand to reason. Modern apartment buildings are expertly tailored to the need of high-end residents and conversions inherently require compromises. Frankly this analysis is difficult; most converted office buildings don’t aspire to compete at the top of the market.
The exception is truly unique, and expertly adapted buildings in which the character of the asset and perhaps its history garner a strong response with the resident. In these cases, the “compromises” actually play as “character” and contribute to the perception that the building is truly unique and there is a customer who is willing to pay for that. But how much?
RCLCO’s work suggests that buildings with this character can achieve a 5 to 10 percent premium to buildings with comparable unit finishes.
An Example
While the examples that come most immediately to mind are “between the wars” buildings, like slender 90 Pine Street in Lower Manhattan, we like the lessons learned from The National in Dallas, a boxy Mid-century Modern structure, where the developer Todd Interests delivered all the Mad Men cool you could hope for. Our analysis dis-aggregates the value-driving impact of the Thompson hotel in the structure (a smart strategy and a topic for a future paper; check out 225 Baronne in New Orleans!) but renters are paying more for the history and design chic.
2. You can’t partially convert an office building. False.
Owners today are often grappling with buildings that have significant vacancy and tenants with long leases. Others worry about the scale of a conversion (too many units?) if fully converted or just want to reduce but not eliminate their exposure to the office market.
There are operating and design challenges to this approach—achieving a dedicated and distinct residential lobby is critical and isolating a residential elevator bank is key—but it can be done. And there are, of course, some advantages to converting only the upper floors of a building to residential in markets in which views drive an outsized premium. This question is increasingly common in RCLCO’s work as of this writing.
An Example
Entirely vacant since 2000, Madison Properties fully reskinned 10 Light Street in downtown Baltimore, Md., leaving nine floors of contemporary, virtually column-free office space while converting the upper two-thirds of the 28-story tower into luxury apartments with rooftop amenities. The apartment component is almost all-view units, significantly enhancing the weighted average revenue per square foot.
3. Floor plates deeper than 100 feet don’t work for residential. False.
Of course, it’s much easier to convert the quintessential 80- or 90-foot-wide building with a central core. Keeping the “lease span,” as architects call it, or distance from the window line to the elevator core to 30 to 40 feet or less makes for optimum flexibility in terms of unit sizes and mix.
But as the industry’s technical knowledge improves, designers are finding creative ways to make larger floor plates work, and not just the costly—although sometimes effective—central lightwell (check out 180 Water in Manhattan for a good example of this).
An Example
20 Broad Street in Lower Manhattan was once home to the New York Stock Exchange and today is luxury apartments. With a lease span of 45 feet (typical floor plate of 18,150 square feet), architects CetraRuddy developed wonderfully quirky solutions, such as off-center windows, semi-demised spaces, interior bedrooms and other solutions, to make the large floor plates work, achieving a market-driven mix of studios, one- and two-bedroom apartments.
4. Conversions work in the suburbs too. True.
Most of the conversions that make the glossy magazines are very urban but most of the office space in America is in the suburbs, and vacancy imperative and accelerating price adjustments make these opportunities increasingly compelling. There actually is a strong market case to be made for focusing on the suburbs: the potential favorable cost and construction dynamics and the fact that many suburban conversions will be the only new high-rise residential in their respective sub-markets. The overall quality of the newer product makes it easier to compete for upscale renters or buyers.
An Example
Developer Madison/Highland has developed a unique live-work product by converting post-War office buildings in suburban northern Virginia office-park settings, including Shirlington and Fairfax. The product, including Mission Lofts in Falls Church, is cool and mixed-use; lofts/suites can flex between office or residential and there is a significant co-working facility in an employment-rich location where the housing is generally not so hip and the customer is paying for it.
5. Office to residential conversion means back to the amenity arms race. True.
Keen market observers have probably noticed that converters seem to heavily (overly?) amenitize these buildings and there is a logic to doing so. Although a converted building can’t always produce the open, window-lined or rooftop spaces, the presence of lots of difficult-to-use space means developers can compete with quantity and they have found an appreciative market. One way to capitalize on the unique nature of conversion is to highlight historic spaces or attributes of the building that speak to its past.
An Example
The Millennium on LaSalle in Chicago is a good example of a very heavily and thoughtfully amenitized building that competes with new construction. Also observe The Foundry in Alexandria, Va., where the internal 3-story gym and 2-story game room create significant market differentiation and also serve as a (albeit costly) solution to challenge number 3 above.
6. All of the residential converting is going to be for rent. False.
Most of the new high-density housing has been rental during the last decade, and lower density is going rental too, but conversion actually presents a compelling opportunity for condo converters. History tells us that condo buyers can be more forgiving than renters and some small buildings that would be difficult to run efficiently as rentals might be perfect for small and narrow studios that can hit a price point unavailable to single buyers and that wouldn’t be optimal product with the flexibility of new construction.
An Example
Octave 1920 in Silver Spring, Md., was an 80,000-square-foot obsolete urban office building that developer Promark converted to 102 mostly studio units. Given the small scale, the fact that studio layouts worked and the ability to deliver units with contemporary finishes under $300,000 meant the product found a customer priced out of the market entirely. Note that the customer was willing to accept the building with no onsite parking. Oronoco in Alexandria, Va., the opposite end of the customer (empty nesters) and price ($1,000 per square foot plus) spectrum, is another successful example in which an obsolete 30-year-old office building allowed a density that current zoning would have prohibited, and allowed for 60 luxury waterfront condos.