The Great Rehumanizing

Efforts to transform vacant buildings into residential units can return life to COVID-impacted downtowns—and help curb the housing crisis. 

It comes as no surprise that the nation is experiencing a growing housing shortage— Harvard’s Joint Center for Housing Studies cited a deficit of more than 3 million homes in 2022. Meanwhile, the amount of vacant office space nationwide has increased by about 25 percent from 2020 to 2022.

Vanbarton Group’s plans for 160 Water Street include adding six floors to an already-tall building as it undergoes a conversion from office space to residential dwelling. Courtesy Vanbarton Group

Almost 1 billion square feet, or roughly 13 percent of the market, now sits unused, according to the New York Times. That has major cities such as New York, Washington, D.C., San Francisco and others asking the same question:

What if all of that empty office were turned into housing?

Existing building restrictions would have made it impossible for the commercial-to-residential project at 160 Water Street to occur anywhere in New York City except in Lower Manhattan—which is where the structure happens to be. Courtesy Collaborative Construction Management

Such an effort, known as “adaptive reuse,” would solve many problems. In addition to bringing purpose to buildings that might otherwise only collect cobwebs, and giving people a chance to become homeowners—or at least get a place of their own, something that a Department of Housing and Urban Development (HUD)-estimated 600,000 homeless people would love to be a part of. And, there are economic, cosmetic and psychological benefits.

While it’s not considered an instant go-to for solving the nation’s housing crisis, acceptance of adaptive reuse is growing. According to commercial real estate firm CBRE, there was an average of 36 office conversions per year nationwide from 2016 to 2021. Forty-two conversions were completed in 2022. But 217 more are on the way or planned over the next several years.

An increase in the number of office conversions would mean more projects for construction workers, and ultimately boost the economy.  

It’s no easy feat, however. Some cities have been trying for years with little or no success due to legal red tape; others are seeing their efforts slowed or stalled due to the pandemic and a shaky economy. But some localities have pushed ahead with positive results.

Offices to Housing: Ahead of Its Time

By mid-2024, conversion will be completed at 160 Water Street, a 24-story, 525,000-square-foot downtown New York City office building that is being transformed in a 588-unit mix of studios, and one- and two-bedroom market-rate apartments for up to 1,000 residents. It will mark the climax of a four-year effort to give a 53-year-old skyscraper a new life that is beneficial to both residents and the city.

The project didn’t start out quite so grandiose. When real estate firm and building owner Vanbarton Group first discussed a plan with New York City-based architect Gensler in 2020, the idea was to turn an empty, obsolete office building into a classy locale that could turn a profit and hold its own within the Financial District of Lower Manhattan.

The company had already completed several successful office-to-residential conversions in Manhattan—including one next door to the current building—which made 160 Water Street an ideal candidate.

It was also evident that the office space market was teetering. Vacancy rates in Manhattan had risen for several years, from 8.9 percent in 2017, to 15.2 percent by 2020, and rental prices by 2017 had stalled at about $72 per square foot after six years of increases, according to market analyst Cushman & Wakefield. (Manhattan’s office vacancy rate has since reached 18 percent and rental prices are down to $69 per square foot.)

Factor in the continual, growing shortage of available housing, a city that was hard-hit by COVID-19, and a workforce that suddenly did not want to go back to the office after a couple years of telecommuting, and the project took on a new light, according to Joey Chilelli, Vanbarton Group’s managing director. “We’re taking a vacant building and pouring life not only into this building, but this entire neighborhood,” he says.

Roughly half of the units will include a home office, an acknowledgment that working from home is still a key factor among the city’s employed, according to Chilelli. “The building has been designed to maximize flexibility for residents seeking space that caters to a live-work-play lifestyle,” Vanbarton Group notes.

The company adds that the site includes a newly created five-story rooftop amenity space, fitness center, co-working space, play space for young children, athletic facilities, smart building technology, and plentiful outdoor space.

An estimated 1 billion square feet of all office space nationwide is unoccupied, and could be converted to residential space.

Adaptive Reuse Selling Points

To make conversions more attractive, cities are loosening up their building requirements. For example, in most parts of New York City, building ordinances prohibit office-to-residential conversion of any commercial structure constructed after 1961. The exception is Lower Manhattan, where the cutoff is 1976. That 15-year difference is a big deal.

Vanbarton Group and Gensler, for example, would not have been able to undertake the 160 Water Street building, which was built in 1970. That’s a lot of economic dollars lost, according to New York City Mayor Eric Adams.

“We must make it easier to convert office buildings, such as 160 Water Street, into housing for New Yorkers,” Adams said during a January press conference. “Just imagine if there are certain buildings we can’t convert just because of the year that they were built. We need to look how we could have a different approach to this problem.”

The city is now considering pushing out the construction edict to 1990

Recommendations within an adaptive reuse study released in January includes extending the city’s least-stringent commercial space conversion regulations to an additional 136 million square feet of office space. This could mean up to 20,000 new homes and 40,000 residents in the next decade, Adams notes.

The study is “a roadmap to deliver on a vision for a more vibrant, resilient, prosperous, and affordable city,” Adams says. “The need for housing is desperate,” he adds. “The opportunity offered by underused office space is clear.”

Cities are also offering tax breaks to developers, but there are strings attached. In many cases, they must offer a percentage of the apartments at below-market prices. For example, in January, Washington D.C. officials unveiled the Housing in Downtown Tax Abatement program.

Builders can receive 20 years of reduced taxes, but they are required to make 15 percent of units affordable housing, and employ local contractors and workers for at least 35 percent of the construction.

While developers say such requirements will prevent them from making a profit with the project, there’s also acknowledgement that housing affordability is a huge issue, especially for downtown districts. Making the units more affordable will draw more residents to the conversions, which will stimulate the local economy, restore tax revenue and restore life to empty downtowns.

Micro apartments—typically under 800 square feet—could be a stylish and low-cost result of adaptive reuse. Such an effort could make a huge dent in the nation’s 3-million-unit housing deficit. Image created with AI technology.

Many Efforts are Underway

Pittsburgh has begun accepting proposals from developers, private groups and others to produce more affordable housing through the conversion of empty or underutilized office space.

Boston’s plan for revitalizing downtown includes an emphasis on additional housing, some of which would come from office conversions. Seattle has launched a competition for downtown building owners and design firms to come up with conversion ideas.

Oregon lawmakers are considering a bill that would require local governments to allow for the conversion of commercial buildings without needing a zone change or conditional use permit, as long as the property is already inside the city’s urban growth boundary.

In California, legislation has been introduced that would prevent local officials from blocking an office-to-housing project so long as 10 percent of the units are affordable, and they don’t exceed basic height and density limits. It would also require conversions to be allowed anywhere, regardless of zoning laws.

Source: Barclays Research

Down and Out by The Bay

If any city needs help with its building conversion efforts, it’s San Francisco, which has one of the country’s worst office vacancy rates. CBRE data places the city’s non-occupancy total at 29.4 percent, versus 18.6 percent nationally, as of Q1 2023. Commercial real estate firm Savills paints an even more dire picture, placing the first quarter 2023 rate at 32.7 percent.

Analysts expect those dismal figures to be even worse after Q2 and possibly through the end of the year, courtesy of the tech industry’s struggles and a stubbornness by building owners to reduce rents.

To make matters worse, The New York Times recently referred to San Francisco as having “The Most Empty Downtown in America.” A recent report by the city’s budget and legislative analyst estimated that more than 40,000 units—a combination of office space and multi-family housing—sit vacant.

With close to one-third of its office space sitting empty and no corrective plan in place, San Francisco has earned the unenviable title of “The Most Empty Downtown in America” from the New York Times. Credit: Ken Lund/Flickr

In response, city lawmakers are considering a vacancy tax, similar to one implemented in Vancouver, British Columbia in 2018. That tariff saw the number of empty units drop by almost 20 percent during its first year of implementation, according to San Francisco Board of Supervisors member Dean Preston. Owners were suddenly very cooperative at cutting rents or making concessions to attract tenants, he notes.

A vacancy tax in San Francisco would actually only apply to roughly 8,000 units, but it could nudge some investors and wealthy corporations away from buying a property and doing very little with it until market prices go back up, according to Preston.

Conversion then steps in. Gensler, which also has an office in San Francisco, has identified 12 office buildings in the financial district that are good candidates for adaptive reuse. More than 2,700 homes could theoretically be built in those structures, Gensler notes.

San Francisco Mayor London Breed notes that office-to-housing conversions hold a lot of promise. The city has other plans under discussion that would make it easier and faster for builders to complete. “The challenges facing downtown require us to imagine what is possible and create the foundation for a stronger, more resilient future,” she says. “We need to make the process easier for getting our buildings active and full.”

In theory, a lot of potential new homes are available with proper public effort. Most can come from converted office buildings, which could produce more housing units than factories and hotels combined. Source: Realogic

New York City, with one of the nation’s highest office vacancy rates, could cut deep into that total with changes in existing construction regulations, according to New York City Mayor Eric Adams. Source: NYC

Building Conversions: Improper Math

For all of their benefits, not everyone is on board with conversions. There are developers who say conversions can be a less-expensive option than building from scratch, largely due to rising construction materials costs during the pandemic era. But for many builders and city entities, the cost of a redevelopment outweighs that for a complete rebuild.

Infrastructure is an issue. The concept of taking a two-story commercial building with 20 offices and turning it into a residential complex with 12 apartments sounds wonderful—until the need for 10 more toilets and a dozen kitchens are factored in.

Uncertainty among builders and architects can rear its unhappy head. According to Chilelli, new construction features numerous “knowns” in terms of design. Conversions aren’t always as worker friendly.

One key, Chilelli notes, is having an experienced consulting team—a group that can efficiently coordinate and complete reuse projects.

In some places, many of the buildings that are better suited to conversion, such as those that are completely vacant, have large meeting areas, or on lots with ample street lighting, have already been acquired or repurposed. “What remains are difficult properties that need significant reworking or tearing down,” notes The Washington Post Editorial Board. “The costs add up.”

A cloudy financial scene hasn’t helped matters. In the past year, average mortgage interest rates have climbed from 3.75 percent to nearly 7 percent and could go higher as the government tries to stabilize the economy, according to Freddie Mac.

Such uncertainty is driving away some developers—and, ultimately, prospective homebuyers—who can’t get or don’t want loans. As a result, others are taking the chance that adaptive reuse is a solid bet.

Silverstein Properties, one of the nation’s largest commercial landlords, plans to spend $1.5 billion to convert unwanted office space into residential housing in markets from New York to San Francisco. It’s a sizable chunk of an estimated $10 billion market, but CEO Marty Burger believes it’s a win-win proposition.

“Now is the perfect storm, where office is not in favor, and the residential market is very hot,” Burger told Bloomberg. “Hopefully we can acquire some of these office buildings that may be obsolete or may not be their highest and best use as an office building, and convert them to residential use, which cities desperately need.”

An experienced consulting team can help prevent miscommunication and efficiently complete reuse projects.

Editor’s Note: Some of the images in this story were created using AI technology. This too, for better and worse, is part of the Great Conversion.