Office-To-Housing Plays Are Buzzier, But Retail, Hotel Conversions May Become More Common

The strategy of converting aging office buildings to residential has become a growing trend in the D.C. area that can potentially help solve two of the region's problems: its record-high office vacancy and its need for more housing. 

Adaptive reuse projects also have benefits such as saving time and maintaining the authenticity of a property, according to developers, architects and local officials speaking last week on Bisnow's Repositioning and Adaptive Reuse digital summit. But they said converting office buildings to other uses also comes with challenges, from the structural layout of the building to the financial feasibility of the project.

In some cases, they said, it may make more sense to tear down a building and start from scratch. And given the challenges of converting office buildings, they said the region may ultimately see more conversions of other struggling product types: hotels and retail.

Two of the primary benefits of keeping a building's structure and repositioning it, developers said, are condensing the development timeline and maintaining the character of a property.

"One of the things we take into account, and I find myself convincing bankers of all the time, is the amount of time you save in adaptive reuse," Urban Investment Partners principal Steve Schwat said. "You can adaptively reuse a building faster than new construction. You don't have to dig a hole, and you don't take the risk of what you find in that hole."

UIP in 2018 completed the conversion of a Tenleytown office building into 100 apartments. It also converted a West End building that formerly served as a hotel and as a George Washington University dormitory into apartments. 

Schwat said unexpected costs always arise with these conversion projects, and the financial savings can sometimes prove elusive, but he tends to lean toward adaptive reuse rather than new construction. 

"I prefer renovating old buildings. I think it's a little more challenging than building new, and I think it's interesting to try to reuse different elements of the buildings that you're renovating," Schwat said. "We seem to always convince ourselves that it's better to reuse what's there."

Lantian Development CEO Bob Elliott said adaptive reuse projects can be especially efficient in saving time when they are located in mixed-use zones that don't require developers to bring a project through a rezoning process. He also said there is less competition for acquiring properties that would be repositioned compared to buying a development site. 

"What we all really love about these repositioning opportunities is the speed to delivery, the challenge, the fact that it's a fairly unique beast that a lot of people won't even tackle," Elliott said. "A lot of developers just go in and do ground-up development, so it really limits the field of people that have the expertise and willingness to dive in."

Roadside Development founding principal Richard Lake said in some cases, like his firm's redevelopment of the former Fannie Mae campus on Wisconsin Avenue, preserving a historic building can allow a developer to unlock additional density. Because the zoning is measured from the Wisconsin Avenue roadway, he said the topography of the site allowed Roadside to gain an additional two stories of development by starting 20 feet below street level. 

Lake said that preserving the recognizable Fannie Mae building, which will house a Wegmans grocery store and other uses, gives Roadside's City Ridge project a level of character that wouldn't be possible with ground-up development. 

"If you took that building down and there was no context to what there was before, no reminder, it could be anywhere USA," Lake said. "We’ve seen that happen in neighborhoods where people have taken down old structures and built new and tie nothing back to the original neighborhood. It loses its soul. When you see these old buildings come back to life, they’re supposed to be a little rough on the edges, that’s what makes it feel comfortable."

Gotham Urban Ventures CEO Desa Sealy, who previously served as the associate commissioner for the General Services Administration's Public Buildings Service, said the unique character of historic buildings provides an intangible value that is difficult to measure. 

"Part of the question about 'are you going to pivot and reuse or are you going to start from new?' In some ways, you can't compare them," Sealy said. "It's not just the dollars and cents in terms of the cost, but all of the intangibles that go with it that make it special."

While conversions have the benefits of saving time, preserving character and helping to balance city's office and residential markets, they can often be difficult to make happen. The structure of office buildings sometimes doesn't work for a residential conversion, and apartments tend to be less profitable in most neighborhoods, making the financial math harder to pencil. 

"The biggest problem in D.C. with converting an office to residential is the shape of the building," Monument Realty principal Michael Darby said. "The boxes are usually wider. If it's 110 feet wide and its mid-block, you've got a problem."

While Schwat said converting a building can save time as compared to tearing it down, he said the cost savings often aren't as much as a developer anticipates going into a project. He said older buildings can sometimes present new issues during construction that weren't evident at the start.  

"What we've learned most from adaptive reuse projects is what seems like obvious savings often are elusive," Schwat said. "You cannot do enough due diligence on an existing structure. It is amazing how many things are hidden behind the walls, so you can make very few assumptions about what you're going to find."

Sarosh Olpadwala, director of real estate for D.C.'s Office of the Deputy Mayor for Planning and Economic Development, said the agency has had discussions with many developers who are considering conversion projects, but it has found that it is often hard to make the math work. He said a 2019 study from the Office of Planning found that the cost savings of conversion projects compared to tearing down and rebuilding are "diminimous."

"Conversions are a very intuitive concept: You have a building that's empty, let's use it for something else instead of building a new building," he said. "It turns out, after we've done studies, there are systemic issues that are barriers to that intuition, so what is conceptually a good idea might not be practically a good idea."

In addition to the financial issues on the cost side of the equation, residential buildings also have less revenue potential than office buildings in D.C.'s central business district.

An Office of Planning report released last month found that rents for Class-A office buildings in the Central Washington submarket were $20.03/SF higher than Class-A residential. It also found that Central Washington's Class-C office buildings, which tend to be more likely conversion candidates, still achieved rents $7/SF higher than Class-A residential. 

"The value of office properties are much higher than residential properties, so the motivation isn't there," Olpadwala said. "A lot of office building owners are willing to wait it out."

While the math downtown can be tricky, in other submarkets such as Rock Creek West, Near Northwest and Upper Northeast, the OP report found that Class-A residential projects achieve higher rents than Class-C offices. It concluded that there are the most opportunities for office-to-residential conversions in the Rock Creek West submarket, which is also an area where the District is looking to spur more housing development. 

"The stock in Rock Creek West tends to be [Class-]B and C, it tends to be a little bit older," Olpadwala said. "The market's probably not coming back there. So there are fundamental issues that make that an ideal location. But for the District, it's an ideal location because we want to see much more affordability in Ward 3."

Last month's OP report also studied the feasibility of converting hotels to residential. It said that given the oversupply in the D.C. hotel market and the slow recovery the industry is facing, hotel owners may be more likely than office owners to consider conversions. 

Olpadwala said DMPED has heard from more hotel owners than it has office owners about potential conversions to residential. He said the structural layout of hotels tends to be better suited to residential conversions than office buildings, and hotel in some submarkets face a more difficult road to recovery than offices.  

"We do see a lot of opportunity in hotels," Olpadwala said. "Structurally in terms of the building it's a lot easier, and in some cases hotel products probably won't survive."

One major hotel that is being eyed for a potential conversion to residential is the 1,152-room Marriott Wardman Park Hotel. The owners filed for bankruptcy in January after permanently closing the hotel and are looking to sell the property.

Olpadwala said he does see an opportunity to create housing on the site, but he said it may make more sense to tear down and rebuild a new project than to convert the building. 

"That is a very ideal candidate for the kind of new housing production, particularly affordable, that we're looking for," Olpadwala said of the Marriott Wardman Park hotel. 

Aging malls and other retail properties also present attractive opportunities for conversions, developers said. 

Lake said that many of the D.C. area's struggling retail properties have locations that make them well-suited for conversions to new uses. He gave the example of the Friendship Heights' Mazza Gallerie mall, which sold in August at a foreclosure auction. 

"These small malls, even though they were not very efficient and great, they had great infrastructure, they have great access to the road network, they are set up for peak traffic patterns, and they can fit really well for adaptive reuse," Lake said. 

Sealy agreed that failed retail properties make ideal candidates for mixed-use projects, adding the example of the Montgomery County's White Flint Mall, which has already been mostly demolished. 

"I think the real pivot and reuse is going to be in retail, because the White Flint Mall, Mazza Gallerie are forms that have died, and this [pandemic] just put the nail in the coffin," she said. "So it will be very interesting to see what happens with retail space."