Adaptive Reuse: Inventive Reimagining of Former Workplace House to Tackle Differing Calls for | Pillsbury – Gravel2Gavel Development & Actual Property Regulation

Empty downtown office buildings. Housing shortage in almost all important markets. Is there a way to address both issues simultaneously by converting historic but underutilized office buildings into downtown apartments and condos? An idea that has been discussed in recent years and implemented in some cities. But while the idea seems simple enough — repurposing existing office space for residential and mixed-use projects — there are some real challenges that limit the feasibility of converting large offices into apartments.

The commercial real estate market faces an uncertain future. While some companies have begun to require employees to return to the office, many continue to work under their hybrid or fully remote working models, which companies may commit to permanently. And while office occupancy has risen in some major cities in recent months (CBRE notes that both Austin and Houston had occupancy rates above 60% in January, up about 25% from 2022 levels), are the ongoing impact of COVID-19 and uncertainty in global financial markets is keeping many office buildings in the country’s major cities empty. Those returning-to-office tenants are focusing their office space searches on high-quality, sustainable spaces with plenty of amenities to encourage workers to return to the office. This flight to quality leaves behind some older and in many cases architecturally relevant office buildings. As a result, there are growing opportunities for the potential adaptive reuse of these existing underutilized structures.

Repurposing existing structures removes or reduces some of the hurdles that new construction projects typically face. While the interiors of these buildings need to be modernized to meet residential standards, the foundation, core and shell of the building are already in place, eliminating the need to build the vertical components of the project from scratch. Depending on the size, age, and layout of the original structure, the remodeling project may utilize existing HVAC, electrical, plumbing, and elevator systems. These benefits can significantly reduce the time and expense required to bring new housing units to market.

However, adaptive office-to-home reuse also comes with some unique and extensive costs that may make the model unaffordable for specific projects or specific markets. While project developers can save money by using the core and skin of the existing building, they will still incur significant upfront acquisition costs. The interior work itself will also come at a high price, which in turn will require developers to seek deeply discounted offers from motivated sellers looking to sell an otherwise difficult or vacant asset. And while the existing core and shell are present in these buildings, office and residential floor panels inherently differ in ways that cannot always be reconciled. Office buildings have deep floor slabs that make it difficult for natural light to reach the interior, and utilities tend to be centralized, meaning existing HVAC, electrical, and plumbing installations may need a major upgrade to accommodate shifts of use from offices housing into account.

Zoning and planning approval processes, building codes and tenant protection regulations are other issues. Cities like New York and San Francisco have strict tenant protection measures such as rent controls and relocation requirements, further increasing operating costs not typically incurred by office buildings. And residential uses are not always permitted by law in central business districts, meaning conversion projects may be subject to additional (often voluntary) review and permit requirements from local governments beyond what would be required for a traditional office development.

Houston: Realizing the potential for converting large offices into residential buildings
Houston, a city known for leading innovations in energy and medicine, has embraced the concept of adaptive reuse, with two iconic mid-century office towers already converted into residential buildings. 800 Bell, an iconic 1960s building that served as ExxonMobil’s former headquarters, was recently sold to New York-based developers who intend to convert the 45-story office building into residential units. Across from downtown, 1801 Smith, another 1960’s office building, is currently being converted into a 372-unit luxury complex, with completion expected later this year. 1801 Smith is a terminus for a portion of the sprawling corridor system connecting 95 city blocks of downtown Houston, which will allow future residents easy access to the downtown community’s restaurants and retail outlets. These projects underscore the benefit of bringing residents to central business districts and promote sustainability by keeping people close to their jobs, within easy reach of public transportation systems and vibrant downtown amenities.

Houston’s Downtown Redevelopment Authority (DRA) is seeking to fund a new adaptive reuse incentive program aimed at redeveloping and repurposing underutilized downtown office space. The DRA recently received funding to conduct a feasibility study in the area to identify potential building candidates and measure owner interest in a full office conversion program. The feasibility study is designed to assess the economic challenges associated with adaptive reuse in Houston, as well as the legal, regulatory and permitting concerns associated with conversion projects.

Government involvement likely needed to facilitate conversion projects
Realistically, given the financial hurdles, government support and funding may be required to make widespread office conversion a reality. The DRA recognizes that one of the critical limiting factors in a full office to apartment conversion is the upfront cost, and notes that the Houston local government must be willing to provide financial support and encourage developers for the office conversion program to be effective tax incentives. Houston has a history of such government support for inner city development initiatives; Between 2012 and 2016, Houston implemented a program designed to incentivize the construction of medium- and high-rise residential buildings in downtown Houston. The Downtown Living Initiative has been very successful as the more than 15,000 units built since the initiative began represent nearly two-thirds of all housing in downtown Houston. Time will tell if other cities make similar efforts to support office tower conversions into apartments, and if such actions significantly change the feasibility of future conversion projects.

Federal politicians have also considered supporting conversion projects. Michigan Sen. Debbie Stabenow and California Representative Jimmy Gomez introduced the Revitalizing Downtowns Act in 2021, expanding existing investment tax credits to add a qualifying office remodeling credit. The credit would be 20% of the conversion project costs incurred in converting a building that (1) prior to conversion was a non-residential building offered for rent to office tenants, (2) essentially from an office use to a residential and commercial use converted for retail use or otherwise used for commercial purposes; and (3) not used for residential purposes for at least 25 years prior to conversion. To qualify, a project would have to include affordable housing – 20% of the units must be available to people whose income is 80% or less of the area’s median gross income, unless the building is subject to a written state or local affordable housing restriction Living room . It’s unclear if the legislation will be reintroduced in the new Congress, but the bill shows the will of policymakers at the national level to support the efficient use of city real estate.

These projects can be expensive, but serve as a tool to address both the problems of much-needed housing and persistent vacancy in business parks. Local efforts such as those proposed by Houston’s DRA, along with similar programs at the local, state, and federal levels, provide opportunities for owners and developers to access otherwise economically unviable or unaffordable projects while meeting the larger social need for more housing opportunities in these large urban areas .

[View source.]