What Would It Take to Turn More Offices Into Housing? Vast amounts of empty real estate are a crisis for building owners. But some politicians and business leaders hope they can be converted into something new — and transform downtown neighborhoods. [nyt]

https://www.nytimes.com/2022/12/27/business/what-would-it-take-to-turn-more-offices-into-housing.html

What Would It Take to Turn More Offices Into Housing?

Vast amounts of empty real estate are a crisis for building owners. But some politicians and business leaders hope they can be converted into something new — and transform downtown neighborhoods.

By Emma Goldberg

Dec. 27, 2022, 3:00 a.m. ET

There’s about 998 million square feet of office real estate across the United States that’s available but in search of a tenant.

That’s thousands of old cubicles, conference rooms, pantries and cafeterias sitting in ghostly quiet. That’s a vast amount of empty space — nearly 13 percent of the market — that could be turned into two-bedroom apartments, big-box retailers, boutique hotels, community college classrooms or even studios for artists. At least that is what city governments and developers are discussing with more urgency, as researchers estimate that office value will plunge 39 percent from prepandemic levels.

What looks like a catastrophe to many building owners presents an opportunity, a possible catalyst for converting some older office spaces to new uses and transforming downtown neighborhoods into areas where people can also live, especially as the United States faces a deficit of more than three million homes. City and business leaders from New York, Chicago, Philadelphia and Seattle last month began a series of meetings, convened by the Brookings Institution, where they will exchange ideas on re-envisioning the future of their downtown business districts.

Members of the group are gathering data on the downtown share of jobs and housing, real estate leasing trends, public safety and public transit ridership in their cities. The task force hopes to help city leaders invigorate commercial areas that have sat eerily quiet for nearly three years, even as mayors like London Breed in San Francisco and Eric Adams in New York have implored office workers not to, as Mr. Adams put it, “stay home in your pajamas all day.”

“We’re not focusing on recovery in terms of trying to create a time machine,” said Tracy Hadden Loh, a Brookings researcher who created the group.

Couldn’t at least some of those empty buildings be housing? Especially in cities where rents continue to rise and availability is scarce, that is one of the more compelling proposals being discussed. It’s also one of the more complex ideas.

Most office buildings are laid out differently from residential spaces. They might have columns every 20 feet, windows that don’t open and too much space from wall to wall. And, most critically, office real estate has historically been far more expensive per square foot than apartments.

In Washington, D.C., just one in about 20 office buildings is a good candidate for housing conversion, said Josh Bernstein, chief executive of Bernstein Management, which owns and operates both residential and commercial real estate. The conversion alone might cost about $400 or $500 per usable square foot, Mr. Bernstein added, and would in many cases be more expensive than building a new development.

A recent Moody’s analysis of New York offices found that just 3 percent of the buildings it tracked would be viable for apartment conversions. The median rent for apartments in New York is $55 per square foot, which just 36 percent of office properties now fall at or below — and on top of that, there’s all the cost of conversion.

“It’s much easier to theorize about office-to-residential conversions than to execute and profit on them,” Moody’s analysts wrote.

But if office value eventually dips low enough, some real estate developers are noting, the math for more conversions could begin to work out.

Between 2016 and 2021, 218 offices across the country were converted to other uses, or about 36 each year, according to the real estate group CBRE. Roughly 40 percent of the conversions were for multifamily housing, creating 13,420 apartments. This year has seen a slight uptick, with 42 office conversions completed so far across the country.

Some people contemplating the future of downtowns are thinking even more creatively. Emma Wiseman, a puppetry artist, started working on a horror movie just before the pandemic about an apocalypse in which only office supplies like staplers and paper clips survived. Then she watched as offices sat empty and people locked down at home. Now she is writing to real estate experts asking what it would take for New York to turn some of its empty buildings into studios and venues for artists.

“There’s a sadness to all these things that are built for a purpose and then go unused,” Ms. Wiseman said.

In Chicago, Michael M. Edwards, who runs the Chicago Loop Alliance, a business organization, has been watching a halting return to downtown offices unfold. He started going back to his own office in the spring of 2020 and recalled biking down the street past boarded-up buildings and empty skyscrapers. When he took the train, he noticed the silence, the absence of all the suited-up businesspeople who used to commute alongside him.

Mr. Edwards is excited by a plan that the city has begun developing that would use office conversions to create 1,000 housing units, 30 percent of them affordable, along LaSalle Street, a major business thoroughfare. With more people living downtown, Mr. Edwards argues, more people could easily commute to downtown jobs.

He notes that this push to bring more housing downtown is part of a recent trend: Roughly 40,000 people live in the downtown Loop, up from just about 13,000 a decade ago. Apartments in the Loop are renting at higher rates than they were prepandemic, indicating that people are interested in living in that downtown bustle.

“You’re in the middle of everything,” said Mr. Edwards, who used to live in the Loop. “It’s a 10-minute walk to work, so all of a sudden you have two hours of commute time back.”

In New York, too, some real estate owners are calling more emphatically for conversations on housing conversion. They note that companies are increasingly looking for new offices with luxe amenities — Class A spaces — in what real estate firms are calling a “flight to quality.” That leaves millions of square feet in lower-class spaces, often constructed before the 1980s, that is likely to sit empty.

“Some of these buildings are going to become ghost buildings,” said Bill Rudin, whose family business owns and operates commercial and residential properties. “The marketplace is telling all of us we need to do something else that’s imaginative, out of the box, but has been proven to be successful.”

Lower Manhattan offers a model of the possibilities of turning a commercial neighborhood into a partly residential one. Facing financial difficulties in the early 1990s, New York State passed a tax abatement program, called 421-g, encouraging the conversion of old offices into housing. As a result, nearly 13 million square feet, or 13 percent of Lower Manhattan’s office real estate, was turned into residential space between 1995 and 2006.

“We have been here before,” said Maria Torres-Springer, New York’s deputy mayor for economic and work force development, in an interview, noting that Gov. Kathy Hochul and Mayor Adams this month proposed changes to state law to encourage office conversions to housing. “We don’t sit on our hands.”

Ms. Torres-Springer added, though, that office conversions would be a slow, long process. “A lot has to align for a building to convert,” she said. “The reality is a few thousand units in our core business districts have converted over the course of the last decade.”

Some of the New York leaders who were most involved in the transformation of Lower Manhattan, like Carl Weisbrod, former head of the Downtown Alliance, noted that the law didn’t require the creation of affordable housing, which is now top of mind for the city and the state.

Philadelphia passed its own tax abatement program in 1997, spurred by New York City’s, and extended it in 2000. The program led to 180 building conversions and a 55 percent increase in the number of people living downtown.

Philadelphia’s economic growth has been slow in recent decades, compared with places like New York and San Francisco, but this year major cities have expressed interest in learning about its tax abatement program, according to Paul Levy, president of Philadelphia’s Center City District.

“We’re a tortoise that was at the back of the pack for a long time,” he said. “But suddenly there’s a lot of exhausted hares with unused office buildings.”

Now more building owners are agitating for governments to create incentives that will ease office-to-housing conversions. Mr. Bernstein in Washington, for example, said he had been meeting with elected officials about the need for conversions to housing and other uses as office values plummeted and vacancies rose.

Washington had seen only 11 offices converted to housing over the past two decades, according to 2019 data, and at the time five more were in progress. Mr. Bernstein’s company bought a 1960s-era office building just last month that he plans to turn into a hybrid hotel and apartment building.

“From where I’m sitting, this is a slow-motion train wreck,” Mr. Bernstein said. “Don’t let a crisis go to waste. D.C. and other cities have the opportunity to reimagine their downtowns, but I don’t think it’s going to happen without public incentives.”

Emma Goldberg covers the future of work for the Business section. @emmabgo

A version of this article appears in print on Dec. 27, 2022, Section B, Page 1 of the New York edition with the headline: Turning Empty Offices Into Potential Housing. Order Reprints | Today’s Paper | Subscribe