Introduction
Office Space Transformation is revolutionizing the way we work. Learn how converting unused buildings into modern offices boosts productivity, sustainability, and community engagement.
Many American offices are sitting empty. New numbers show 94,000,000 ft² of empty office space in Manhattan. That is an all-time record.
Huge investors like Blackstone and Brookfield are staring down defaults in their office portfolios. Meanwhile, finding an affordable apartment can feel impossible, which has a lot of mayors talking.
We have a great opportunity to change the mix of uses in downtown areas. The goal is to make it easier to convert unused office space into housing.
Office to apartment conversions sound like a great idea—nobody’s going to the office, and we need more housing supply. Why not just turn all the office buildings into apartments? However, it’s not quite as simple as it sounds.
Not every office building is suitable for conversion. Not every conversion should be done. Not every building should be converted.
In some cities, laws are making conversions difficult. For instance, it was about 3% of the New York stock that we saw as being convertible, and that took into account the price differential between offices and apartments, which has not diverged as much as people may think.
In places with a lot of older office buildings, there’s a lot of conversion activity happening. Some big cities are looking at incentives for developers who convert buildings into housing. Nobody does things in the real estate world out of the goodness of their heart; we have to find ways to either require or incentivize these projects to happen.
Conversions
The office conversion trend is heating up in a small group of cities led by Washington, D.C., and Philadelphia. We are currently in the Poplar Building in Philadelphia.
The building was built approximately 100 years ago as offices and manufacturing space for Strawbridge’s Clothiers, a giant department store in the last century. This building is one of several conversions conducted by the Post Brothers.
Physically, it may have had some characteristics that people might think would make for a tough conversion. For instance, it’s 100 feet wide by 400 feet long.
This means lots of dark interior space. The first consideration for many of these buildings is access to light and air. That’s why, in some situations, real creative redevelopment of these buildings involves driving a core into the middle of the building to allow for additional windows in the middle.
We took a building that was a perfect rectangle and carved it into an E. You also have issues with where the plumbing lines run. It sounds silly, but you need to have a bathroom in every apartment or more than one.
If you only have a single line of plumbing or a single area of plumbing because offices had bathrooms only in one part, it will be much more expensive to convert that.
Builders call this technique remassing, and it comes in different levels of intensity. The population in Philadelphia received a light touch.
We have units that are 50 feet deep as opposed to the typical 25 feet to 30 feet deep. We’re able to make them work with things like borrowed light bedrooms or interior bedrooms with a light, creating really attractive layouts, even though the floor plate might not seem ideal.
Prices
Converted apartments tend to be pricey, much like other real estate in the U.S. In a hot market with a lot of demand for housing and growth, such as Denver or San Francisco, conversions could potentially address maybe 10% of the housing need. That still leaves the other 90%, so there’s a clear need to think bigger about how we’re going to build more housing.
Back in Philadelphia, the typical household makes enough to afford about $1,300 in rent a month. At the Poplar, single bedrooms can rent for $2,000 a month. Then there are projects like The Atlantic, where units can rent for $3,000 to $6,000 a month.
It was a 1920s Beaux Arts Office building. We finished the conversion in 2019. There, we made a lot of structural modifications.
As an office building, it had old mechanical systems that took up basically the entire roof area. When making those major structural modifications, it’s to allow for really high-quality amenities.
The Post Brothers’ portfolio includes 12 buildings in the mid-Atlantic with plans for expansion. We’re generally 96% occupied at all places, and there might be 1 or 2 weeks of downtime between the old tenant and the new tenant. That’s what we call frictional vacancy. So that’s really the only vacancy we have.
Vacancies
Office vacancy rates are currently high in terms of historical context, the highest ever recorded, at a 19.3% vacancy rate on average. New York’s rate hovers around 12% to 13% right now.
That’s a bad sign for investors.
How the streets feel in downtowns has changed a lot in the past three years. Not all of those changes are permanent. It is necessary for downtown cities to address that perception. Though many offices are quiet, they’re not completely empty. That’s a challenge for developers.
The actual vacancy status or occupancy status is really the single most important prerequisite for conversion, much more so than the physical layout, floor plates, or systems.
When a developer looks for an office to convert, they’re looking for certain criteria. For example, older buildings tend to make for better conversions, but the typical U.S. office is newer, bigger, and not vacant enough to be converted yet. These are massive problems for city mayors.
We have millions of square feet of unused office spaces that are right now ready to be converted into housing. This just makes sense.
Office vacancies also affect government finances. New York City offices generate roughly $6 billion in taxes each year. School districts rely heavily upon property taxes.
Transit authorities like MTA in New York rely more on property taxes. New York has experimented with office conversions in the past. In the years after September 11th, a wave of these projects rippled across lower Manhattan.
We looked historically at the number of conversions identified in New York going back to 2000, and there were about 50 of them, resulting in about 2.5 conversions per year. Rule changes in lower Manhattan helped spur new life in that part of the city, and the result has been a success.
The residential population has tripled, creating tens of thousands of new units and really transforming Battery Park and the surrounding area into a residential neighborhood.
Policies
The government’s policies can determine whether or not these projects happen. In Manhattan, commercial buildings generally can take up more space than residential ones. That condition and many others can change the financial outlook of a project.
The number one issue in New York is zoning. Washington, D.C., for instance, has thought out the zoning in a way that allows for effective conversion of any office building by right to residential. In New York, this is not the case right now.
Unfortunately, in New York, the zoning is dictated at the state level and not the city level, leading to a lot of fights with New York trying to get this changed. There’s a lot of attention to this issue. This is what it takes to get it done. People are reading through 50,000 pieces of paper to actually get housing built in our city.
In Philadelphia, a ten-year tax abatement brought more development downtown. This policy saved home renovators and investors more than $1 billion in taxes. However, just over half of those breaks went to owners of high-value properties.
If it was a conversion, you were taxed on the value of the shell that you bought, but not any of the money you put into fixing it up. This has been hugely valuable.
Post Brothers has two major conversions in the works in D.C., where the local government also wants to increase tax breaks for downtown developers.
That’s Washington, which is frankly one of the easier markets. When you look at the West Coast markets, San Francisco has the highest GDP per person of any metropolitan region in the country.
Office buildings there, just four years ago, were valued north of $1,200 a foot. Four years ago, it had the highest residential rents in the country, higher than Manhattan.
Critics of these policies say they’re unnecessary developer handouts. Supporters hope the additional supply will calm the housing markets in expensive major cities.
The U.S. needs about 7 million more market-rate homes at affordable price points for extremely low-income renters. The vast majority of people who are eligible to receive housing assistance never receive any.
To maintain equilibrium between supply and demand, we only forecast 38,000 more per year up to that point, which will fall well short of that 500,000.
It’s important that we enable this opportunity for the sake of our commercial office stock and the opportunity to create new housing. We project that over the next ten years, we could create 10,000 to 20,000 units of housing, and that is our best projection.
However, we also recognize that a lot of this is due to factors that are well outside our control, such as interest rates, individual property owners’s risk tolerance, or building layout.
There is real complexity here. Our rules are in the way, and we need to fix that.