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Crash Pad
Topics: Business Ventures-Buildings and FacilitiesInnovation-GeneralEngineering-Construction
Crash Pad
Topics: Business Ventures-Buildings and FacilitiesInnovation-GeneralEngineering-Construction
Crash Pad
When 4753 North Broadway opened in 1924, the neoclassical tower represented the height of American architectural design, a terra-cotta temple of capitalism at the heart of Chicago’s Uptown neighborhood. Over the next century, a series of banks occupied the spacious first floor, while upper stories hosted medical, law, and nonprofit offices. But by 2019, its small suites felt dated, and developers launched a four-year, $58 million project that would bring the building into the 21st century—not as offices, but as luxury apartments with polished concrete floors, stainless steel appliances, and dazzling Lake Michigan views.
For anyone who couldn’t snag one of the 176 studios and one-bedrooms (they start at just under $1,400 a month), plenty of other office conversions are in the pipeline. At least 100 commercial-to-residential projects were underway in major American cities at the end of 2023, according to the property data firm CoStar, with another 200 in the planning stages. Policymakers have greeted the trend with enthusiasm, as it seems to offer a single solution to twin real estate crises that were amplified by the pandemic: More and more white-collar employees are working remotely, a trend that has left city centers with a glut of vacant office space—according to CoStar, as much as 1 billion square feet nationwide. Meanwhile, demand for housing, especially in the country’s most economically vibrant cities, is far outstripping supply, causing rents to soar and shutting families out of homeownership.
“People love the idea, and I have always loved the idea,” says Laurie Gould (MBA 1996), a partner in Massachusetts-based VIVA Consulting who focuses on affordable housing. “We have these downtowns that are underutilized.” Yet what sounds like a ready-made fix isn’t as simple as it sounds.
“It can be really difficult, physically, to convert office buildings,” Gould explains. “Almost every place in the country has building codes such that, to be a bedroom, it needs to have natural light. An office building may have huge floor plates”—that is, leasable square footage on each floor—“and lots of little cubicles on the inside. Turning those into units with light is not at all easy to do.”
Still, post-pandemic trends are reshaping commercial real estate markets in ways that favor repurposing at least some office towers, Gould says.
“One of the things that has happened is that, since there’s now this glut of office space, businesses are moving from Class B and C to Class A office space, which tends to be in the bigger, newer buildings,” Gould says. “And that leaves some of the older buildings empty. These are easier, physically, to convert because they have a smaller floor plate and more windows.”
Indeed, buildings that date to the early 20th century, like 4753 North Broadway, make up the bulk of conversion success stories, while construction from the past few decades, with the amenities that suit today’s businesses, will more likely remain offices. It’s blocky, mid-20th-century towers that represent the toughest cases. In the decades after World War II, as air-conditioning and fluorescent lighting became standard, floor plates grew to proportions that would accommodate trading floors and cubicle farms, making natural light a scarce commodity.
“Some of these buildings are functionally obsolete,” says John Macomber, a senior lecturer in finance at HBS and the coauthor of Healthy Buildings: How Indoor Spaces Can Make You Sick—or Keep You Well. The former chairman and CEO of a large general contracting company, Macomber is also principal in several real estate partnerships, and he brings the practical perspective of an investor to the matter. Converting a neoclassical building in a neighborhood with the sort of retail and cultural amenities residents clamor for often makes financial sense, he says. But even in those cases, the cost of renovating may be more than simply building from scratch.
“You get to reuse the skeleton and the foundation, but that’s about it,” he says. “In my own portfolio, we’ve knocked down multiple office buildings and built new apartment buildings from the ground up.”
According to a CoStar analysis, conversions cost an average of 20 percent more than new construction. Because developers must recoup these additional costs, such projects are unlikely to provide immediate relief for families in need of affordable housing. That’s reflected in converted skyscrapers’ sky-high rents—for example, Santander Tower, a steel-and-glass landmark in downtown Dallas, where a two-bedroom with a commanding view runs more than $4,000 a month.
While reuse might not always make financial sense, it does have environmental benefits. The embodied carbon in steel and concrete is significant, and construction debris makes up as much as 40 percent of solid waste in landfills. Many communities also care about preserving a historic look, which makes conversion more palatable than demolition. And when zoning is flexible, reuse projects may be quicker to commence because fewer permits are required than for new construction.
“It’s good social engineering,” Gould says, explaining that creating housing in historic neighborhoods allows more people to live in dense, walkable communities, reducing transportation-related emissions and preserving open space elsewhere.
These advantages, if coupled with tax and financing incentives, may be enough to nudge conversion projects along despite the physical challenges. That’s what many American cities are banking on. San Francisco, which reported an office vacancy rate of nearly 34 percent last September, has made zoning adjustments, tax and fee reductions, and other support available for specific conversion projects, which could also be helped by a move to loosen land-use laws at the state level. In October 2023, Boston launched generous property-tax abatement for conversions. City leaders hope the program will fill vacant buildings and increase foot traffic in neighborhoods that have felt desolate since the pandemic.
Meanwhile, the federal government has announced its own incentives, with billions of dollars in below-market loans and grants as well as technical guidance available through the federal departments of Transportation and of Housing and Urban Development. Proposed legislation known as the Revitalizing Downtowns Act would establish a new tax credit for office conversions, and the General Services Administration, the agency in charge of federal property, is marketing its surplus real estate specifically for commercial-to-residential conversions, an effort it says has already produced 1,000 new homes.
Such programs are a great start, Gould says. She acknowledges that office-to-residential efforts can address only a fraction of the demand for housing, but every little bit helps. “It will require a major investment from cities, states, and the federal government to have it happen at scale,” Gould says. “Still, these downtowns have to reinvent themselves as something other than what they were.”
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