Converting office space to homes — buzz then boom?
A recently announced makeover of a downtown San Diego high-rise has added more fuel to the tantalizing prospect that increasingly vacant office buildings could help solve the housing crisis.
The new owner of Tower 180 on Broadway plans to convert the 25-story office building into residences and a hotel, with ground-floor shops.
Meanwhile, Mayor Todd Gloria’s administration is still in negotiations with a developer who has proposed turning the city’s vacant 101 Ash St. office building into nearly 400 units of affordable housing.
There’s widespread enthusiasm for such conversions, in large part because they address two problems: the need for housing and making use of the postpandemic surplus of office space.
“This presents an area of opportunity to both increase housing supply while revitalizing main streets. It’s a win-win,” said Lael Brainard, director of the National Economic Council, in late October.
That’s when the Biden administration unveiled a broad push across various federal agencies to encourage the conversion of office buildings and other underutilized commercial areas into housing, providing tens billions of dollars in tax credits, low-interest loans and other financing to help with the transition.
In August, Gov. Gavin Newsom announced that three state office buildings in Sacramento will be converted into upward of 400 homes.
“We need to build more housing, faster,” the governor said in a statement. “Projects like these are reimagining what our cities look like — creating more housing near transit, work, and shops — all while increasing affordability and fighting climate change.”
Some development experts caution that transforming office buildings may not be the silver bullet for the nation’s affordable housing shortage.
“The marginal increase in housing from the program is beneficial, but the changes are at the margin. They will not dramatically increase the number of housing units,” Jeffrey Havsy, office conversion expert at Moody’s Analytics, told Axios following the White House announcement.
Joshua Ohl, San Diego director of market analytics for CoStar, suggested the Tower 180 project at this point could be “a one-off.”
“It’s hard to say if it’s going to create a trend,” Ohl told Jennifer Van Grove of The San Diego Union-Tribune last week. “I think (there is) going to be a piecemeal approach to the individual properties that might be targeted for such conversion opportunities, simply because some properties are not going to be able to financially pencil out.”
In the near future, there appear to be other more feasible opportunities to redevelop or convert properties into more housing. Those include building more housing where smaller, aging apartments now sit, increasing density in single-family-home neighborhoods — including through accessory dwelling units — and transitioning other commercial areas, such as strip malls and larger malls.
But building more homes in residential areas uniformly draws strong neighborhood opposition. That’s less likely in office and commercial areas, where heavy traffic and available parking already exist, along with a lot of necessary infrastructure.
Converting office buildings can be a costly undertaking and result in expensive housing, which isn’t what’s needed.
Changing that equation may come with a market
gyration that some analysts say is all but unavoidable: the significant reduction, if not the collapse, of the office building market. An analysis in the Atlantic called empty office buildings “the next crisis.”
Remote working took hold during the pandemic, and while many people have returned to the office, many have not. Virtually no one expects office demand to return to pre-pandemic days. Businesses are reducing their office-space footprint, or trying to do so.
Buildings are losing their
value and that’s expected to continue, possibly in a big way. Those properties likely would be put back on the market at a deep discount. That would create better economics for remodeling office space for homes.
“At that point, that’s where the imagineering begins,” said Gary London, senior principal at the San Diego real estate consulting company London Moeder Advisors. “How can we creatively adapt to the new market reality?”
Pressure is growing to figure out what to do with
unwanted office space.
According to data released by the federal government, San Diego’s downtown had a 24.3 percent office vacancy rate in the second quarter of 2023. The rate in suburban and other areas was less, but still in double digits. Across the region, office space vacancy was 15 percent in Q2, according to commercial real estate brokers Cushman & Wakefield.
That’s better than some cities (San Francisco’s downtown office vacancy rate was 31.6 percent), but not others (Miami’s downtown was 14.7 percent). But the vacancy percentage for virtually all major metropolitan areas has grown in recent years.
Analysts expect matters to get worse when leases that were signed before the pandemic expire.
It’s important to note that experts aren’t predicting the death of all office space. Beyond the need for hybrid work space — where remote employees go some days of the week — they expect the “flight to quality” office buildings that already has started will pick up.
That suggests a lot of less-than-A-grade buildings need a new future.
Such changed economics could help offset big costs to convert office buildings. To create numerous living spaces on office floors, there are different plumbing, electrical, heating and air conditioning needs to contend with — in addition to altering the physical space.
In some cases, it might not work even if buildings become a relative bargain. If a lot of interior space can’t be used for housing because
no windows face the outside world, the buildings probably won’t be suitable.
“The key attribute we analyze is the geometry of the building,” said J. Kevin Heinly, San Diego office managing director of Gensler, an international architecture, design and planning firm. “Residential loves narrow floor plates.”
The consideration of office buildings for housing is part of a larger trend to put homes in other sagging commercial areas, particularly retail.
“The most sustainable thing you can do is reuse an existing building,” Heinly said.
The impact of online shopping on brick-andmortar stores was a precursor to how remote work is affecting the office space market. State and local governments in recent years have lifted restrictions that prevented or discouraged housing from being built on commercially zoned property, along with adding other incentives.
The conversion of office buildings certainly is an attractive idea to solve two big problems. The question will be whether it’s too good to be true.