Underutilized Office Properties Could Represent Residential Conversion Opportunities

Office occupancy rates are finally beginning to climb throughout the United States. According to Falls Church, Virginia-based security firm Kastle Systems, which gathers anonymous employee data from workplaces where it provides access-control technology, office usage in the Dallas-Fort Worth area reached nearly 50% for the week that ended June 9; the highest rate among the 10 markets that Kastle tracks. Nonetheless, office utilization still remains low in some of the country’s largest — and most expensive — office markets.

In New York City, for instance, Kastle reported that usage was at 20.7% for the week that ended June 9. And while that represents a 2.5% increase from the prior week, it’s a statistic that is undoubtedly creating consternation for some of that city’s office owners. In fact, it may even have a few of them pondering the prospect of converting a portion of their unused office space to residential use.

Many academics and analysts have long argued that the United States is facing an escalating crisis in affordable housing, and conversion projects could be one facet of a long-term solution to that issue.

Even if office usage in markets such as New York City and San Francisco stabilizes as vaccination rates rise and summer transitions into fall, converting office properties to residential use has a long and storied tradition in major cities throughout the country. As office stock ages and becomes less efficient, it has frequently been given a second-life by urban dwellers seeking distinctive abodes.

John Cetra, one of the founding principles of architecture and interior design firm CetraRuddy, which is based in New York City, told LoopNet that over the course of the firm’s 34-year history it “has worked on numerous conversions of office or loft buildings to residential and we continue to do so to this day.”

When asked what made these projects attractive, Cetra said that “office buildings that are ripe for residential conversion can offer some really interesting and unique product.”

Jenn Chang, vice president of Studio at Common, a residential brand that designs and manages rental apartment buildings focused on a coliving model, echoed this perspective. “Office buildings are inherently interesting architecturally — whether they were built in the 30s or the 80s,” she said.

Exactly which elements make office buildings appealing for residential conversion — and which aspects can make them challenging for that same process — is something we’ll get to in a moment. We’ll also provide a high-level overview of the procedure for determining if a property is suited to conversion. But first, Cetra was kind enough to walk LoopNet though a brief history of office to residential conversions in the city where, arguably, more of those projects have transpired than anywhere else in the world: New York.

A (Quite) Abbreviated History of Office to Residential Conversions

For decades, loft buildings in New York City have been a sort of cliché, conjuring the habitat of a wealthy, pseudo-bohemian urbanite, but it wasn’t always thus — there was a time when such projects were at the vanguard of American architecture and represented some of the earliest examples of office to residential conversions.

According to Cetra these properties, in New York City at least, largely dated from the late 19th century. They initially functioned as light manufacturing and warehouse spaces, before transitioning into office use. These buildings were particularly suited to residential conversion “because they did not rely on air conditioning, so the floor plates were not as large and contiguous as buildings that came later,” Cetra said. Smaller floorplates are advantageous in residential conversion scenarios, as they enable access to light and ventilation. It was also quite common for these properties to be “carved up with courtyards, so that you could create some very dramatic spaces.”

“As those candidates for conversion became less available, people started looking at younger buildings, buildings that would have been built in the 1930s and 40s. And those buildings, some of them, were specifically designed for office use, so they had many more elevators and bigger floorplates,” Cetra said. However, while those properties may have lacked some of the unique features, such as courtyards, that had made the loft buildings so sought after, they added an attribute that architects and developers valued. “Because they came later, they were designed around a different set of zoning regulations, which required numerous setbacks,” Cetra said.

Those setbacks, which typically started at the eighth floor of a property and recurred every few stories, were implemented to promote better light and air conditions on the street below. But as these properties became conversion candidates, the setbacks created an opportunity to add something new to those properties than many urbanities desired: balconies and terraces.

In the loft buildings from the 30s and 40s, Cetra said that elevators frequently needed to be added to make them suitable for contemporary residential users. During the next generation of conversion projects, the opposite was true. “In cases where we were converting those buildings, we would eliminate almost two thirds of the elevators, because a residential building just didn’t have the kind of population and movement that you have in an office building.”

But the floor plates in the buildings from the 30s and 40s were still manageably sized. In fact, architects like Cetra used the somewhat larger floor plates to their advantage. “You had a lot of opportunity to change floor plates and offer different kinds of apartments”; thereby creating variety within a property, as opposed to the homogeneity frequently found in newer ground-up residential buildings. This tendency toward idiosyncrasy aligned well with the end users for these properties, who were frequently seeking a more unique kind of habitat.

As available properties from the 30s and 40s dwindled, architects and developers began considering office properties built in the 1950s through the 1960s. It was at this point that the floor plates became somewhat challenging. “Because there was more of a reliance on mechanical ventilation … the floor plates could get even larger.”

Nonetheless, even those large floor plates could be viable, but it depended on market demand. When the office buildings from the 50s and 60s began to be converted, from the early aughts until about 2014, Cetra said that most conversion projects were focused on larger condominium apartments for purchase. “You really could do a lot with these large units, and you could get it to work in very dynamic ways,” he said. Cetra referenced kitchen pantries, large foyers or interior office spaces as some of the uses they implemented in those larger apartment units.

Now, though, as developers and architects begin contemplating the conversion of properties from the 1970s through the 1990s — buildings that have even deeper floor plates, often 20,000 square feet or more — residential demand has shifted to smaller rental units. In New York City the average size of a one-bedroom unit in a new rental building is between 600 and 650 square feet. “Doing that in a conversion is a little bit more difficult because the floor plates are so much deeper,” Cetra said. “So, how do you create these spaces?”

What Attributes Make an Office Property Suitable for Residential Conversion?

Cetra’s history of office to residential conversion projects touched on some of the aspects of these properties that make them compelling conversion candidates, such as smaller floor plates, courtyards and setbacks that enabled the addition of terraces and balconies.

In addition to those features, Chang noted several other captivating qualities office buildings can offer to the residential user. “They often have a high glazing-to-opaque ratio, which means large windows with lots of light around the perimeter,” Chang commented. She added that “they also often have better ceiling heights compared to residential buildings built in the same era, which [can create] great spaces after you remove the acoustical ceiling tiles.”

Both Cetra and Chang noted that location is often an advantage office properties possess. “Commercial developments are also typically centrally located, which provides great access to transportation and recreational activities,” Chang said.

And, of course, there’s that unquantifiable factor of distinctiveness. Cetra noted that conversion projects offer the opportunity to fabricate “really interesting kinds of spaces because of some of the eccentricities of these buildings.”

Those “eccentricities” can extend to the exterior of these properties, as well. Cetra discussed three properties that his firm redesigned for conversion that were originally designed by noted architect Ralph Walker. All three properties were former switching stations for telephone carrier Bell Telecom. And while they had rather utilitarian interiors, they boasted elaborate and often beautiful art deco facades.

Potential Challenges of Office to Residential Conversion Projects

As previously referenced, perhaps the primary challenge in office to residential conversion projects is the depth of office floor plates — an issue that has only been exacerbated in more modern office properties.

“The deeper parts of the building, without access to natural light and air, can become unusable space in a residential setting, affecting the viability of the conversion,” Chang said.

As Cetra noted, it is possible to overcome this obstacle if the residential units are on the larger end of spectrum, but efficiency can become an issue if you’re competing with smaller rental units. “[In] some of the very, very large buildings we looked at, we couldn’t really make it work,” Cetra commented. “The problem was that the units might have gotten too big, and so the efficiencies then are just not what a bank would want to lend money for.”

The efficiency issue becomes particularly problematic when you’re competing with new residential properties in which the distance from the window to the corridor wall is typically 30 to 35 feet; that just isn’t feasible in many modern office properties. Nonetheless, Cetra said that if you think creatively, it can still be possible to achieve the requisite efficiencies, noting that it may mean “reconfiguring things and moving things around in very interesting ways.”

Chang also noted that Common’s approach to residential properties, which is centered around a coliving model as opposed to the typical one-bedroom or two-bedroom apartment units, can be notably well-suited to conversion projects. She said that Common is “able to creatively layout the spaces using shared living arrangements, turning wasted square footage into valuable space.”

Of course, floor plate efficiency isn’t the only potential challenge confronting any developer bold enough to consider a conversion project. Chang felt that “zoning and financing are the biggest roadblocks to [conversion] viability. More often than not, commercial buildings are not zoned flexibly and will not allow for other uses without a rezoning process.”

Cetra mentioned that it’s possible to request special appeals from the local standards and appeals board, but that process could be very time consuming, often taking a year or more.

As for financing, Chang said that “if the office building is already capitalized as an office asset, it’ll be very tough to convert to residential. Office lease structures have a very different structure and risk/return profile, and if debt was placed on the building assuming an office use, lenders will want to keep it that way.”

The Office to Residential Conversion Process

Based on our conversations with Cetra and Chang, LoopNet developed the following high-level overview of the process investors should implement if they are considering an office to residential conversion project.

Investors should first review zoning requirements and consider how the building is capitalized. Next, engage in a design feasibility study to analyze the building plans and determine the viability of creating units to fit the desired market. Some items to consider are:

• What is the highest and best residential use, i.e., condominium or rental units?
• What are the optimal sizes for the units?
• If the floorplate is too large to allocate all of the floor area to the net residential area, explore the possibility of creating an interior courtyard or creating a co-living facility. It could also be valuable to consider maintaining some office use within the building, particularly for lower floors with larger floorplates.
• Analyze the floorplate to determine if you will need to reduce the number of passenger elevators.
• Investigate if it will be necessary to replace the exterior facade for compliance with ventilation and energy code requirements.
• Analyze the zoning and building codes to determine if the existing bulk is in accordance with exterior yard requirements.

If all of these elements are aligned to allow for a possible conversion, proceed with project design and enlist technical experts and estimators to see where the current building conditions might unexpectedly affect your assumptions.

The Potential Future of Office to Residential Conversion Projects

Cetra and Chang both felt it was too soon to say if we were on the cusp of a surge in office to residential conversion projects. “We’ll know probably within the year,” Cetra commented.

The future of these conversion projects may also lie in the hands of local municipalities. According to Cetra, “building regulations were changed in the ’60s to allow for certain kinds of conversions. At that time, nobody was thinking about these mega office buildings being converted, they were thinking about the smaller, loft buildings that were going to be converted.”

Accordingly, the multiple dwelling laws were revised — initially to enable the conversion of buildings that were formerly used as loft office buildings. The new regulations stipulated that the depth of the rear yards could be up to five feet, but a building facing another building had to have at least 20 feet of rear yard space. “This is very different than in a new residential building, where the minimum distance of a rear yard is 30 feet required by zoning, and almost nationally that rule exists for residential buildings,” Cetra said.

But when these rules were drafted, at least in New York City and in some other municipalities throughout the country, they only applied to buildings that were constructed prior to 1961. Now that the potential conversion stock almost entirely comprises buildings that were built after 1961, will the regulations be revised to allow new projects to come to fruition? And will developers pursue a conversion project even if it means reducing the property’s footprint to comply with yard requirements? “Many people would scoff at that idea,” Cetra remarked.

Nonetheless, Cetra noted that conversions remain alluring for developers because, even with all the additional considerations at play, “the building is there already. I don’t have to excavate; I don’t have to build a super structure. I have to do a lot of other things, but some of those [existing elements] just put me so far ahead of the cycle of construction and completion.”

Chang and Cetra both noted that in a moment when “hybrid” may be one of the most overused words in our culture, hybrid — or mixed-use — properties could be the most viable way forward.

“I think we are beginning to see thought leaders from both the private and public sectors come up with interesting proposals to address this. From the design end, I can see many new hybrid ways that buildings can be used, ways that exist outside the traditional asset classes,” Chang said.