Multifamily housing expert Michael Zalansky writes that despite the need for more affordable housing, office renovations are unlikely to solve the problem more effectively or cheaply than new construction. . However, in some cases, it makes sense.
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The former United Artists Building in downtown Detroit is an 18-story historic building that once housed a theater, bank, and commercial office space. The building had been mostly vacant since 1983, but an $80.8 million public-private redevelopment transformed the site, according to the U.S. Department of Housing and Urban Development.
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Scheduled to begin leasing in late 2024, The Residences @150 Bagley will feature 148 apartments, 30 of which are listed as “affordable units” for households earning up to 80% of the city’s median household income. It is scheduled to be done. It could also serve as a future model for vacant buildings in cities.
HUD states in its 2023 Guidebook on Adaptive Reuse of Commercial Space that “commercial conversion is by no means a panacea to our housing supply, affordability, or emissions-related challenges.” . It has the potential to create thousands of much-needed homes while reducing the carbon footprint of existing buildings. ”
It seems so common sense and simple. The United States has too little housing and too much empty office space (20.1%, an all-time high, according to Moody’s). So why not solve two problems at once?
Although the idea is serious and well-intentioned, it paints a broad picture of the complex, impractical, and expensive reality of adaptive reuse. It has become one of the most popular stories in real estate after the global pandemic. “Can we turn all vacant office buildings into housing?” he asked CNN. “Can we save downtown by converting office towers into apartments?” wonders New Yorkers.
Let’s look at this problem in action.
Advantages and disadvantages of adaptive reuse
CBRE reports that 169 office-to-residential conversions are underway or planned, potentially adding 31,000 apartment units to the U.S. supply over the next few years, which is certainly beneficial. is. However, as CBRE also notes, “this additional supply represents less than 0.5 percent of the total U.S. apartment inventory and will do little to alleviate the overall U.S. housing shortage.”
This is the reality of adaptive reuse. This is a positive effect for a measure that focuses on urban areas where there is a lot of empty space. As a long-term strategy to substantially address housing demand, this is a bandage. Here’s a sample for pros and cons:
Advantages of adaptive reuse
It increases access to affordable housing. Cities large and small are in desperate need of housing that impacts more income groups. Office renovations could bring more affordable units downtown. Utilize public electricity for housing. In some cases, it is cheaper to reuse a building than to demolish it and build a new one. This is especially true when local, state, and federal grants are available for such projects. Local governments can also expedite regulatory and zoning processes when they need to increase their housing stock. Revitalize urban areas. Adaptive reuse that brings people to new apartments downtown also has the potential to bring more jobs, commerce, and culture to those areas. Promote sustainability. Research shows that office renovations require less new materials than new construction and do not increase overall energy usage.
Disadvantages of adaptive reuse
Conversion costs can range from $250 to $600 per square foot, according to CBRE. Without a publicly funded component, developers may try to tear down the site and launch a new one. Often it’s unrealistic. Office buildings are not designed for residential use. Once light, heat, air conditioning, water, and waste are available, the transformation becomes a 3D jigsaw puzzle. Zoning from commercial to residential complicates and delays the process. That misses the point of real estate. Is the transformation to urban centers without schools, shopping, dining, and nightlife really true to the idea of ”location, location, location”? It may be too early to panic. Are you convinced that working from home will empty all your office space? Companies are rethinking remote work, and this could bring back some of these characteristics. As the Brookings Institution points out, there aren’t that many offices downtown. They have “too little else.”
When it is reasonable to convert from office to apartment complex
Projects like The Residences @150 Bagley in Detroit, which have components of publicly-funded affordable units, may be a way to achieve adaptive reuse. Of the project’s estimated development cost of $80.8, $42.3 was funded by a HUD mortgage loan and more than $30 million in federal and state grants.
HUD offers Community Development Block Grants to help developers acquire buildings and finance their projects. We provide below-market financing and access to state and local financial recovery funds to reduce long-term costs. HUD’s 2023 Guidebook lists dozens of programs across seven agencies that can help developers commercialize.
Conversion is having an impact in some cities. CBRE reports that Cleveland reduced its office vacancy rate to 17.3% by converting 3.5 million square feet of space. Cincinnati (2.8 million square feet) and San Francisco (2.1 million square feet) follow suit.
In Seattle, 14% of office buildings could be converted to multifamily housing, according to Moody’s. Sixty-four buildings in New York could be repurposed as part of the city’s Office Transformation Acceleration Program. And California recently approved $400 million for developers to consider conversions.
Vacant buildings are assets that require cash flow, which reduces their long-term and resale value. From that perspective, the conversion makes sense. However, there are many ideas for conversion.
What about renting vacant office space to small businesses, day care facilities, or public services? Could some of this space be repurposed as technology storage or self-storage? What if we demolished some office buildings and started over? What will happen?
We need more housing, especially affordable housing. Still, it’s hard to imagine that office renovations will solve this problem more effectively and cheaply than new construction. Nevertheless, adaptive reuse could impact the future of urban multifamily housing by effectively leveraging federal grants and loans and by helping cities lower logistical hurdles.
Michael H. Zaransky is the founder and managing principal of MZ Capital Partners in Northbrook, Illinois. The company was founded in 2005 and deals in multi-family housing.
