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March 30, 2023
In major cities nationwide, conversations around how office-to-residential conversions might be key to solving some of the major issues impacting our cities have reached a fevered pitch. In the wake of the COVID-19 pandemic, cities still face a shortage of housing that meets the needs of an increasing portion of their citizenry, while vacancy rates in downtown office buildings steadily climb. The correlation between the need and the supply could not be clearer.
For the past two years, Gensler has been engaged with building owners and jurisdictions to study this phenomenon. Owners are looking to understand the broader value of their assets in rapidly shifting markets, and jurisdictions are seeking to solve a housing crisis and reanimate downtowns hollowed out by the pandemic. Given the amount of change affecting our cities, both owners and jurisdictions want quick answers.
In 2021, Gensler developed a conversion calculator that rapidly assesses the suitability of commercial buildings for conversion to multifamily residential using criteria common to all buildings and information that is readily accessible. Rather than undertake an extensive design process, which could stretch for months, the tool delivers valuable feedback in weeks, providing owners with an alternate to traditional building repositioning upgrades. Further preliminary steps include test fits, yield studies, and ROM pricing with general contractor partners. To date, we have studied over 650 office buildings in cities throughout North America and are engaged with jurisdictions to examine the impact of conversions and how they might be accelerated.
While residential conversions can be used as a means for rebalancing a real estate portfolio, it requires proper valuation of the asset under consideration. Still, the value of buildings with office occupancy continues to remain too high for conversions to pencil in most situations. Should vacancy rates continue to rise or remain at current levels for a prolonged period and should the cost of construction plateau, building owners may reassess recent conclusions around conversion.
FLIGHT TO QUALITY
During the decade-long rebound from the Great Recession, vacancy rates across all classes of office buildings continued to tighten and lease rates increased even as a significant amount of new Class A office product was brought to the local market. As post-pandemic return-to-office rates have plateaued in the low-40% range, large tenants have exited leases, consolidating into fewer and newer buildings as part of a “flight to quality.” Even as the volume of visitors to the region continues to climb toward pre-pandemic levels, the challenges within the retail and food and beverage segments of the market continue to affect the vibrancy of our downtowns. To fully recover, city cores need more people working and living there. Since the pandemic, our downtowns are moving away from mono-use commercial cores toward 15- to 20-minute cities characterized by a mix of uses. People want to live closer to the schools, work, shopping, and entertainment they frequent.
The flight to quality represents a lesson for our civic and corporate leaders. What can we do as a community to revitalize our cities? As the data indicates, younger office workers are attracted to companies that are engaged in their communities and provide amenitized workplaces. Post-pandemic return-to-office patterns demonstrate how these two go hand-in-hand. As we emerged from the pandemic, companies worked to entice employees back with amenity-rich offices, a focus on wellbeing, and work environments and experiences that cannot be replicated at home. Yet this has not fully succeeded.
While it is essential to continue to meet the evolving needs of employees, of equal importance are the engaging amenities outside of our workplaces, whether it’s living close to work or having easy access to a variety of experiences and services in our downtown neighborhoods. Findings from Gensler’s 2022 City Pulse Survey indicate that Seattleites consider the five most important features of a great downtown/central business district to be: 1) restaurants/cafes/bars; 2) parks/green spaces/other outdoor social spaces; 3) theaters/performing spaces/other entertainment venues; 4) public transit; and 5) shopping districts. Increasing the resident population of our downtown is one step toward this.
Increasing the percentage of residential space downtown could indeed help revitalize our city centers, but there are still barriers within Seattle codes and policies that hinder owners and developers from pursuing office-to-residential conversions. In its current form, the land use code does not anticipate large-scale conversions of existing buildings from one use to another.
Modifications to the code, including allowing larger, existing tower floor plates to have residential uses, would streamline the process. The specter of a Substantial-Alteration designation within Seattle’s existing building code represents one of the more significant impediments to most developers’ renovation plans given the expenses for required seismic and energy code upgrades. A full-building office-to-residential conversion would invariably trigger substantial alterations under the current interpretation of the code.
With these potential obstacles in place, how can developers, architects, and city leaders work together to mitigate the current policy barriers? Defining a reasonable path that safeguards future residents while treating conversions more akin to a tenant improvement would help keep costs in line with what a more affordable housing market can support.
The Puget Sound area continues to attract residents from all parts of the world to its cities. As we invest in the sustained growth of the region through mass transit, education, and social program spending, the availability and affordability of housing remains a primary focus. Office-to-residential conversions represent one additional tool in that effort one that specifically impacts the future success of our downtowns. As with all other tools utilized in this great endeavor, this one deserves our attention.
Case Creal is a design manager, studio director, and modular design and construction expert out of the Gensler Seattle office. He has built his 20-plus-year career on helping owners, contractors and consultants find solutions to issues of speed, quality, constructability and resilience.