2C — August 19 - September 15, 2022 — Owners, Developers & Managers — M id A tlantic Real Estate Journal
www.marej.com
O wners , D evelopers & M anagers
By Jim Rickard, Withum Repurposing Commercial Office Buildings
C ommercial office build - ing conversions are widely discussed but rarely acted upon. Leases on
ployees work remotely or on a hybrid schedule. With office vacancies on the rise and an increasing need for residential units, especially affordable housing, office-to- residential conversions are often offered as an easy solu- tion.If commercial rents and vacancies continue to trend negatively, building owners may need to repurpose the properties out of necessity. While such conversions may make sense in certain situa- tions, widespread conversions don’t appear feasible in the current environment. What are the challenges
owners might face in commer- cial to residential conversions, and what solutions and oppor- tunities make these projects more viable? Challenges Converting office space to residential faces many poten- tial challenges. Governmental Challenges • Zoning – Repurposing of buildings can often involve a lengthy rezoning process. • Building codes – Resi - dential building require- ments often contain specific requirements that would be difficult to achieve in an office conversion.
investment. Conversion to housing will require an ad- ditional investment, and that investment might not create an equivalent increase in the value of the property. Will capital be available to complete these conversions? • Comparable cost – In many areas of the country where land is relatively inexpensive, it is less expen- sive to build housing from scratch than to convert old office buildings. Physical Challenges • Lighting – Office build - ings often have very wide floor plans with the center of the building being used for storage or other functions that don’t need much natural light. Residential space, by contrast, needs light through- out. Parts of a residential building that are too far from natural light may not meet code or the expectations of potential residents. • Plumbing – Plumbing in office buildings is generally very focused on one or two areas toward the center of the building. Residential will require plumbing in every unit, often towards the outer portions of the building where most bedrooms would likely be placed. • Electrical – Electric work would need to be rerouted and essentially re-wired from scratch. Solutions While such conversions face numerous challenges, there are potential solutions that may make them more feasible and lead to an increase in office-to-residential conver- sions moving forward. Local Government Solutions Municipalities can aid in the process by simplifying the approval process for rezoning. Building codes can be revised to provide property owners greater flexibility. Local Government Funding Governments will continue to evaluate the lost revenue from commercial properties, which could lead to budget deficits. Certain municipali - ties may find it economically feasible to invest in office-to- residential conversion proj- ects through public-private partnerships, tax credits, or affordable housing incentives. Federal Government Funding The federal government could introduce incentives to continued on page 10C
Economic Challenges • Rental premiums – In many markets, office space has a rent premium versus residential. This results in office buildings, even those with 30% and higher vacan- cies, returning higher overall rents than residential. • Conversion period – Con - version from office to residen - tial takes time, and during the conversion process, the owner will have no revenue but will continue to pay carrying costs. • Conversion cost – Con - versions cost money and building owners already have a substantial capital
roughly 11% of office space in the U.S. are set to ex- pire this year and leases on an estimated
Jim Rickard
900M s/f of office space nation - wide are set to expire by 2025 according to a study by JLL (Sisson, 2022). Many tenants will seek to decrease their square footage as more em-
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