By Maren Reepmeyer AIA, LEED AP
Office vacancies are at an all-time high and the impact is being felt far and wide, particularly in urban areas. Buildings (across all classes) are not only experiencing increases in availability, businesses that support these tenants and benefit from foot traffic are particularly vulnerable. This domino effect impacts the economic health of cities while altering the way they look and operate.
In response, local government agencies are urgently seeking solutions to revitalize the city’s streets while tackling the growing housing shortage. The housing conversion that transforms office buildings into livable metropolises presents a unique opportunity to achieve both goals. But how do you determine if a conversion project is viable?
This article will help you overcome the barriers of converting an office building into a residential property. It gives you 12 industry secrets to better assess the feasibility – and associated capital expenditures – of each asset in your portfolio. With these insights, you are optimally positioned to make the best decisions for your project and determine the next steps.
SECRETS OF SUCCESS – SGA’S FEASIBILITY FRAMEWORK
When considering an office-to-residential conversion, the first thing to consider is whether or not you need to apply for a zoning permit to complete the conversion. Is residential use permitted by law? If so, consider it a win and proceed to the second recital evaluation below. If not, what’s your path to relief? Is there any precedent that would support your claim? It is important to understand what schedule implications there could also be depending on your city’s process.
To provide incentives and offset challenges associated with conversions, many U.S. local jurisdictions have (or are considering) implementing more lenient rezoning in areas most severely affected by office vacancy and housing shortages. Other incentives include federal and local tax credits and special funding to help drive the transition.
Ultimately, when considering your Return On Investment (ROI), it pays to understand what Floor Area Ratio (FAR) (if any) is on the table. Additionally, allowable height is an important component to understand when evaluating your site-specific maximized zone area. Maximizing square footage often translates into high returns, and in the case of conversions, creative solutions can result in unlocking an asset’s greatest potential.
Structural classifications and possible upgrades
Depending on the age of the building, the originally classified building type may be obsolete and therefore framing reinforcements and retrofits may be required to accommodate the expected loads associated with new use. Similarly, a usage change could trigger a code-required seismic upgrade, which can be costly. It is important to understand the existing conditions and capacities so that the ROM for upgrades can be determined in advance.
Depth and proportions of the floor slab
Efficient floor slab sizes and dimensions for commercial office buildings do not always match well with ideal floor slab sizes and dimensions for residential units. Sometimes they do, but often – particularly in Class A buildings – they don’t. Typically, the most critical dimension is from the core to the outer wall. In general, a city office building can have a core-to-wall dimension that is 1.25-1.5 times longer than we would typically see in a ground-floor residential building. One of the main reasons for the flatter dimension is that it allows more light to enter the unit. Considering a rebuild in the scenario where the floor panel is lower, the question arises – what to do with that extra SF? Every building is different and one size doesn’t fit all, but here are some creative solutions to consider:
- Attach a light well
- Use these additional SF to amenitize the building (e.g. Co-working, Fitness, Laundry, Pet Spa/Playroom, Lounge, Party Room, Speakeasy, Kitchen/Bar, Sound Booths, Games, etc.)
- Launch retail offering (e.g. coffee kiosk, smoothie bar, wine bar, golf simulator, etc.)
- Introduce balconies on the outer wall
- Modernized adaptable apartment floor plan
- In the unit of gliding/fitness/cave program
- In Flex indoor-outdoor unit
There are many solutions from a spatial layout point of view that can make the remodeling a fruitful endeavor, but of course you need to assess what the market allows to get the best results. In many cases, we believe that the unique offering will give your asset an edge over its competitors.
Another consideration when looking at bottom plates and efficiencies is the potential increase in dissipation factor when dealing with usable SF. To achieve the best results, one must compare market tariffs to usable SF while evaluating and defining potential load factors.
As part of the code analysis, it is important to assess the building’s stairs and elevators before determining whether upgrades or (additional) redundancies are required. Elevator modernization may be advisable due to the age of the building. In addition, load-bearing capacity and travel distances must be verified for all stair cores.
In a mixed-use scenario, consider convergence guidelines for any stairway that serves occupants in more than one type of use. Double rows of elevators will also likely be required in a mixed-use scenario. In addition, you should consider redundancy at each elevator bank, as well as sizing for cargo and guernies.
MEP/FP infrastructure upgrades
When converting a building from office tenants to apartments, demolition plans vary widely and therefore a redistribution of the mechanical, plumbing and electrical components of the building is essential. In addition, the existing measurement systems will probably need to be reconfigured. Starting with the core core components, MEP/FP infrastructure upgrades are an essential part of a successful transition, but they can also come with additional costs.
With the passage of the new energy law, we find that many buildings built more than 20 years ago have inadequate building envelopes and outdated mechanical infrastructure by today’s standards. When remodeling, building performance and energy consumption must not be neglected. Possible upgrades could include the installation of heavy duty glazing, extra insulation, high efficiency boilers and ventilation systems etc.
Access to fresh air and outdoor space
When converting a commercial building for residential use, access to clean, fresh air is an important convenience that cannot be overlooked. This important component can be incorporated into the design in a number of ways:
- Windows that can be operated in the unit
- Privatized terraces or balconies
- Customizable three-season rooms
- Common courtyard
- Shared or privatized roof terrace/s
- on-site amenities
- Shared Gardens & Biophilia
Each can be accommodated with creative design solutions that are sized appropriately for project programs, competitive market settings, and project budgets. This right-sizing analysis is an important part of the conversion feasibility framework.
Parking lot and site circulation
City-administered residential parking quotas vary from city to city and sometimes from borough to borough. Therefore, it’s important to know what your specific community allows for when considering a conversion. In dense urban centers you may need to get creative when it comes to parking and site development. Although costly, automated underground forklifts can be a smart decision and enhance an asset’s marketability.
Additionally, commercial buildings near public transit hubs are often the best candidates for residential conversions, as many city dwellers live without a car. In these cases, an argument can be made for exoneration of parking regulations.
Tenant amenities and retail activation on ground floor
When considering a building remodel, it’s important to consider the overall street frontage and surrounding neighborhood estates to assess if it fits a residential experience. This includes considering what retail opportunities the baseplate could accommodate and whether they reflect the desires of the market.
Another consideration relates to the placement of the residential entrance suite. In mixed-use scenarios, the project may require two entrances from the street. If this is the case, additional capital may be required to make this program possible. A thorough street frontage assessment is key to ensure the project is market oriented and well suited to local residents.
Apartment mix, marketability and affordable housing
What will the market carry? When sizing your build out correctly, you need to consider the competition. Affordability targets and related incentives also need to be considered. In today’s market, it’s not uncommon to see affordability targets in excess of 20-30% in urban areas. Count and yield are an important part of SGA’s initial feasibility assessment.
Deadlines, contracts and rental conditions
Finally, one has to assess the current utilization of the building and the contractual rental conditions for these tenants. Are there extension rights? break clauses? vacancy clauses? The negotiations could become lengthy and therefore affect the conversion deadlines. Consider displacement strategies and incentives before you dive too deep.
When considering an office to residential conversion, understanding the capital expenditure involved is often the most important factor. To ensure that the project is worth the investment and generates a positive ROI, a feasibility assessment (as outlined above) is a mandatory first step. At the same time, we can assist in performing cost estimates early to test options that align with the presented design solutions so decisions can be made quickly and confidently.
How SGA can help
Would you like to make a change with an A, B or C class building in your portfolio that is underperforming? Do you need planning services or a quick feasibility study for a new conversion project? SGA will help you solve your challenges and save you time and money on 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 office to apartment conversion checklist and learn more about what SGA can do for you.
(Ms. Reepemeyer is Vice President at SGA. Interested in learning more about office to apartment conversions? Please email Maren Reepemeyer.)