So How Do All These Negatives Make A Positive?
The solution may just be repurposing the commercial square footage already available. Currently, society as a whole is seeing more and more real estate developers buying office buildings so they can convert them to residential use. A recent high-profile example was announced in Washington D.C. with plans to convert two older office buildings – Universal North and Universal South – near DuPont Circle on Connecticut Avenue. The buildings, which total 700,000+ square feet, marks Philadelphia-based real estate firm, Post Brothers, debut into the metro Washington D.C. area.
The firm may be onto something, as they found success in redeveloping a former warehouse in Northern Philadelphia into The Poplar, which includes 285 apartments and high-end amenities including a world-class fitness sanctuary rooftop dog parks, and three infinity-edge saltwater pools.
Time will tell how this transition fares, but it looks like many metropolitan areas throughout the country – with our nation’s capital as the main experiment – will be serving as case studies for converting former commercial space into residential housing or even mixed-use development. In an article in the Washingtonian, Senior Editor Marisa M. Kashino was told by John Falcicchio, Washington D.C.’s Deputy Mayor for Planning and Development, that adaptive reuse is needed to “save downtown.” In the metro D.C. area alone, approximately 325,000 units need to be added before the end of the decade in order to keep up with the demand. Many have their eyes on the recently estimated 157.9 million square feet of rentable office space in the D.C. area as a potential solution for this issue.
The Push for Office-to-Residential Conversions
Many other metropolitan areas aside from Washington D.C. are seeing a strong push for adaptive reuse projects focused on converting office space to residential multi-family living – so much so that legislators are even passing laws to assist with this trend. The latest budget for California included a call to action to spend $400 million “as an incentive to developers to convert commercial and office buildings into affordable housing in the budget years 2022-23 and 2023-24.” In early June New York Governor Kathy Hochul signed a bill that made it easier to convert underused hotels into permanent housing. Just last week, city officials in Chicago announced that they would provide tens of millions of dollars to developers willing to convert aging office towers into residential buildings.
New York City’s push for such conversions is also apparent with the $1.5 billion transformation of the former home of Irving Trust Bank at One Wall Street in lower Manhattan, marking itself as the largest office-to-residential conversion in the city’s history. Take a detour west to Salt Lake City, and you’ll find Houston-based developer Hines, an international real estate firm, acquired a 24-story office building – South Temple Tower – which they plan to convert into a 255-unit luxury apartment complex starting in early 2023. Similar projects are also in the works in major cities such as Atlanta and Dallas.
A Look At The Local Forecast
Given the strong trend of these conversions in larger cities, it is inevitably just a matter of time before we see this start to take hold in more sub-suburban areas.
Patrick Zerbe, Commercial Real Estate Agent for NAI Keystone, has been watching this trend start to take hold since the pandemic. “The pandemic fast-tracked transitions in different trends. The largest transition we are seeing in the commercial real estate world are businesses providing remote and hybrid work. With less people in the office, companies and organizations have determined to decrease their footprint, which in contrast has given an influx of vacant office space. We have primarily seen this in larger cities, but this trend is slowly making its way to subsidiary markets,” he explains.
Recent data from Co-Star, a global leader in commercial real estate intel, provides a good example of what Patrick discusses. Reading, PA has a 6.3% vacancy rate for the nearly 13.5 million square feet of office space available in the city. In comparison, of the 323 million square feet of office space in Philadelphia, 10.3% (or 33 million square feet) is currently vacant. This is an increase from the historical average of 9.5%.