By Maren Reepmeyer AIA, LEED AP
With office-sector vacancies reaching an all-time high, the repercussions are being felt far and wide, especially in urban areas. Not only are buildings (across class types) experiencing an influx of availability, businesses that support these tenants and thrive on foot traffic are also particularly vulnerable. This domino effect is impacting the economic health of cities while influencing a shift in the way they look and operate.
In response, local governing bodies are urgently seeking solutions to revitalize city streets while tackling the growing housing crisis. Residential Conversion, which transforms office buildings into live-able metropolitan spaces, presents a unique opportunity to achieve both objectives. But how do you determine if a conversion project is viable?
This article will help you break through the barriers of converting an office building into a residential property. It will provide you with 12 industry secrets to better evaluate the feasibility – and associated capital expenditure – for any asset in your portfolio. With these insights, you will be in an optimal position to make the best decisions for your project and determine the next steps.
SECRETS TO SUCCESS – SGA’S FEASIBILITY FRAMEWORK
Zoning Relief
When contemplating an office-to-residential conversion, the first thing to consider is whether or not you would need to seek zoning relief to execute the conversion. Is residential use allowed as-of-right? If so, consider it a win and proceed to evaluation of the second consideration below. If not, what’s your path to relief? Are there precedents which would support your request? It’s important to understand what schedule impacts could result depending on your city’s process as well.
To incentivize and offset challenges that come with use conversions, many local jurisdictions throughout the US have (or are considering) the implementation of more lenient re-zoning in areas which are most gravely impacted by office vacancies and housing shortages. Other incentives include tax credits at both federal and local levels and special financing to help push the conversions forward.
Ultimately, when weighing your Return On Investment (ROI), it’s worth understanding what (if any) Floor Area Ratio (FAR) is on the table. Additionally, allowable height is an important component to understand when evaluating your site-specific maximized zoning envelope. Maximizing square footage often leads to high returns and in the case of conversions, creative solutions can lead to unlocking an asset’s greatest potential.
Structural Classifications and Potential Upgrades
Depending on the age of the building, its originally classified construction type may be antiquated and therefore reinforcing of framing members and upgrades may be required to accommodate anticipated loads associated with the new use. Similarly, a change of use could trigger a code required seismic upgrade, which can be costly. It’s important to understand existing conditions and capacities so that ROM for upgrades can be determined upfront.
Floor Plate Depth and Proportions
Efficient floor plate sizes and dimensions for commercial office buildings don’t always align nicely with ideal floor plate sizes and dimensions for residential units. Sometimes they do, but often times – especially in Class A buildings – they do not. Typically, the most critical dimension is that from core to exterior wall. In general terms, an urban office building may have a core to exterior wall dimension that’s 1.25-1.5 times longer than we would typically see in a ground-up residential building. One of the main reasons for the shallower dimension is that it allows more light penetration into the unit. When considering a conversion in the scenario where the floor plate is deeper, the question is – what to do with that additional SF? Each building is different and one size doesn’t fit all, but here are some creative solutions to consider:
- Introduce a light well
- Use that additional SF to amenitize the building (e.g. co-working, fitness, laundry, pet spa/run room, lounge, party room, speakeasy, kitchen/bar, sound booths, gaming, etc.)
- Introduce retail offering (e.g. coffee kiosk, smoothie bar, wine bar, golf simulator, etc.)
- Introduce balconies at the exterior wall
- Modernized adaptable residential unit layout
- In unit flex work/fitness/den program
- In unit flex indoor-outdoor space
There are many solutions from a spatial layout perspective that can prove the conversion a fruitful endeavor, but of course, you’ll need to assess what the market will bear for best outcomes. In many cases, we believe the unique offering will give your asset a leg up from its competitors.
Another consideration when looking at floor plates and efficiencies is the potential uptick in loss factor when it comes to usable SF. One needs to measure market rates against usable SF while assessing and defining potential load factors for best outcomes.
Vertical Transportation
As part of the code analysis, it’s important to assess the building’s stairs and elevators before determining whether or not upgrades or (additional) redundancy will be necessary. Elevator modernization may be recommended based on the age of the building. In addition, capacity and travel distances need to be verified at all stair cores.
In a mixed-use scenario, consider convergence guidelines at each stair that serves occupants in more than one use type. Double banks of elevators will likely be required in a mixed-use scenario as well. Beyond that, you’ll want to consider redundancy at each elevator bank along with sizing for freight and guernies.
MEP/FP Infrastructure Upgrades
When converting a building from housing office tenants to residential tenants, demising plans are vastly different, and therefore a re-distribution of the building’s mechanical, plumbing, and electrical components are essential. Additionally, the existing metering systems will likely need to be reconfigured. Starting with the central core components, upgrades to MEP/FP infrastructure is an integral part of ensuring a successful conversion, but it can also come with added costs.
Energy Code/Envelope
With the adoption of the new energy code, we’re finding that many buildings which were built 20+ years ago have under-performing envelopes and antiquated mechanical infrastructure per today’s standards. When contemplating a conversion, building performance and energy usage must not be overlooked. Potential upgrades could include the incorporation of high performance glazing, additional insulation, high efficiency boilers and air handlers, etc.
Access To Fresh Air and Outdoor Space
When transforming a commercial building for residential use, access to clean, fresh air is a vital amenity that cannot be overlooked. This important component can be integrated into the design in a number of different ways:
- In-unit operable windows
- Privatized terraces or balconies
- Adaptable three-season spaces
- Common courtyard
- Common or privatized roof deck/s
- Site amenities
- Common gardens & biophilia
Each of these can be accommodated given creative design solutions that are right-sized for project programs, market-driven competitive set, and project budget. This right-sizing analysis is an important piece of the conversion feasibility framework.
Parking and Site Circulation
City-governed residential parking ratios vary from city to city and sometimes neighborhood to neighborhood, so it’s important to know what your specific municipality will allow when contemplating a conversion. In dense urban cores, you may have to get creative when addressing parking and site circulation. Though costly, automated underground parking stackers can be a wise decision, enhancing an asset’s marketability.
Additionally, commercial buildings located near public transit hubs are often the best candidates for residential conversion, as many urban dwellers live without a car. An argument for relief of parking mandates can be made in these instances.
Tenant Amenities and Ground Floor Retail Activation
When considering a building conversion, it is essential to consider the overall street frontage and surrounding neighborhood assets to assess whether it suits a residential experience. This involves considering what retail opportunities the ground plane could house and whether they reflect the market’s desires.
Another consideration involves the accommodation of the residential entry sequence. In mixed-use scenarios, the project may require two entries off the street. If this is the case, additional capital may be necessary to accommodate this program. A thorough assessment of the street frontage is key to ensuring the project is market driven and well-suited for residents.
Unit Mix, Marketability and Affordable Housing
What will the market bear? One must consider the competitive set when right-sizing your build-out. One must also consider affordability targets and the incentives tied to them. In today’s market, it’s not unusual to see affordability targets upwards of 20-30% in urban areas. Unit count and yield are an important part of SGA’s initial feasibility assessment.
Timelines, Contracts, and Lease Terms
Finally, one must assess the building’s current occupancy levels and contractual lease terms for said tenants. Are there any renewal rights? Demolition clauses? Vacancy clauses? Negotiations could turn lengthy, therefore affecting conversion timelines. Consider displacement strategies and incentives before diving too deep.
Bottom Line
When contemplating an office-to-residential conversion, understanding the associated capital expenditure involved is often the most critical factor. To ensure the project is worth the investment and will generate a positive ROI, a feasibility assessment (as outlined above) is an imperative first step. Concurrently, we can assist in engaging in cost-estimating exercises early to test options aligned with design solutions presented so that decisions can be made swiftly and with assurance.
How SGA Can Help
Are you looking to make a change with a Class A, B, or C building in your portfolio that’s underperforming? Do you need design services or a quick turnaround on feasibility analysis for a new conversion project? SGA is here to help solve your challenges, saving you time and money with your investment. Our experienced and knowledgeable team is equipped to provide you with the best solutions for your portfolio. We understand the complexities of your investment and are committed to helping you maximize your returns.
Click here for a free checklist on office-to-residential conversions and learn more about what SGA can do for you.
(Ms. Reepemeyer is a Vice President at SGA. Interested in learning more about office-to-residential conversions? Please email: contact Maren Reepemeyer.)
