Converting Office to Residential

HOUSTON – (By Cynthia Lescalleet for Realty News Report) – Too many vacant office buildings. Not enough housing. Converting some of the former into more of the latter is an intriguing topic for property redevelopment. But it’s not a slam dunk solution.

Since 2016, about 35 such projects a year have converted properties in the top 25 markets in the U.S., with the potential to perhaps double their presence in the near future, according to CBRE’s Julie Whelan, global head of occupier research. That’s about 2 percent of office stock.

But while the forecast is for the trend to continue, it’s not going to resolve all the vacancy out there, Whelan said noted panelists at the National Association of Real Estate Editors at its recent NAREE conference in Atlanta. “These are early days for all this.”

Pricing is a barrier, and the least expensive building is not always the best building to convert, panelists said. Other factors include location (as always), whether the building’s floorplate is suitable, rising interest rates and access to architects and contractors used to these types of projects.

Finding a building ripe for conversion is in itself a challenge. Hotel groups snapped a lot of them up for conversions of their own.

To date, successful completed office-to-residential conversions have had a few things in common. The properties tend to be older and smaller scale, an average of 80 years old and up to 175,000 square feet in size. Many of them have been historic properties, which now even includes ones from the early ‘70s.

As part of the panel, two developers in the chute to convert historic properties in Houston and San Antonio shared their project parameters.

Dougal Cameron Tackles The Espersons

In downtown Houston, the adjacent Niels and Mellie Esperson buildings, 1927 and 1941 respectively, are slated to become “a vertical entrepreneurial village,” said Dougal Cameron, president of Cameron Management. Plans for the combined 600,000 square feet of space include a mix of 100,000 square feet of residential — with its related amenities – atop 400,000 square feet of office and another 100,000 square feet for more flexible uses, such as co-working or even start-ups.The ornate building is located at 808 Travis Street at Walker Street. When it was completed decades ago, it the tallest building in Houston and called the tallest building west of the Mississippi River. The Esperson is adorned with columns, urns and terraces.

In another downtown Houston conversion, the 1801 Smith building will soon be 321 apartment units. The building was acquired last year for $20.6 million.

San Antonio Tower Life to be Converted by Ed Cross

In San Antonio, Ed Cross of Cross & Co. is a partner in the 1927 Tower Life building, a 31-story office tower located on the River Walk he called “the original mixed use of its era.” Plans incorporate 234 housing units, an amenity deck with River Walk views, and 150,000 square feet of retail in space long-walled off at street level.

“It hits every box,” Cross said. “It’s well-built. It’s in fantastic shape. It’s on the historic horseshoe of the river.”

With the multi-family segment of the market hot, office conversions to residential are understandably topical, said Jamie Woodwell, vice president in the research and economics group at Mortgage Bankers Association.

Hines Converting Tower in Salt Lake City

Hines – the Houston-based developer with 200 projects now under development around the world – has taken notice of the trend. Earlier this year, Hines acquired the 24-story South Temple Tower in downtown Salt Lake City for its first residential redo. The 217,000-SF building will become 255 upscale rental homes.

Hines says buildings that are conversion candidates are everywhere – if they are in the right location and can be acquired at the right cost. “They are going to be buildings from the previous era that have become obsolete,” says Texas-based John Mooz, senior managing director for Hines.

Developers are currently considering a number of office-to-apartment projects in Houston, both in downtown and in suburban markets, such as the Galleria area, says Michael Vaughn, senior vice president with Arch-Con Corp., a Houston-based construction company where he oversees multifamily and hotel construction. Office towers typically have adequate electricity and plumbing infrastructure for handling a full load of residential units – all with comfortable apartment ceiling heights, Vaughn said

In Houston, the opportunity for office conversions is even more intriguing as the office market goes through a slow patch.

Houston has an office vacancy rate of 25.2 percent – the highest of any major city in the U.S., according to CommercialEdge. Companies that do sign new leases are usually reducing their footprint.

Starwood Property Trust, a firm led by Barry Sternlicht, is evaluating the prospects for added residential to its 5555 San Felipe tower on the northwestern edge of the Galleria area. The 41-story, 1.2 million-SF office tower is about 30 percent leased, leaving plenty of room for living units.

The 5555 San Felipe tower, formerly the home of Marathon Oil, is located in the upscale Tanglewood area between Sage Road and Chimney Rock. Tanglewood has a strong high-rise residential market. The new Hawthorne condo tower under construction by Pelican Builders on San Felipe a couple of blocks from the 5555 San Felipe tower, was topped out recently amid brisk sales activity.

Photo: Courtesy of CBRE.

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