New Office Conversion Study by Downtown Houston +

HOUSTON – (By Cynthia Lescalleet for Realty News Report) – Converting underutilized office towers into more diverse uses continues to gain traction in markets across the country and account for about 2 percent of office stock in the top 25 markets.

Proponents of such projects say conversions could help relieve high office vacancy and low residential availability, shore up real estate values – affecting property tax values, improve retail viability, retain character, and boost density to add more vibe to underperforming properties.

Documenting Conversion Feasibility

In Houston, a recently released feasibility study commissioned by Downtown Redevelopment Authority took a deeper dive into the potential for office conversions within its boundaries. AECOM evaluated the challenges, made recommendations for creative financing options and incentives, and assessed some hypothetical projects involving office properties of various age, size, cost and occupancy.

The findings add some teeth to the conversation on conversions here, and are a step toward “shaping an adaptive reuse incentive program, Central Houston sources say.

From a feasibility standpoint, market forces alone are unlikely to trigger residential conversions, the study indicates. It recommends Central Houston create a suite of resources, incentives and other tools that build upon the previous Downtown Living Initiative.

Since no two office conversions are alike, there is no single tool to address the mixed bag of complicated challenges, says Kris Larson, CEO of Downtown Houston+, which includes the Downtown Redevelopment Authority.

There are, however, some steps to be made by the organization, he says. Among them, assemble a task force of aligned entities; explore creating a collaborative tool kit of resources available on a case-by-case basis; and shepherd projects eyeing the path of conversion.

Any future program would need to be authorized by the Downtown Redevelopment Authority board and approved by Houston City Council.

Building a Conversion Tool Kit

Among the study’s strategies to increase private sector office conversions are:

  • An enhanced tax incentive program to build upon the success of the previous Downtown Living Initiative.
  • Increased participation in funding tax incentives by other entities, such as Harris Country and adjacent TIRZs.
  • Tax exempt bonds for lower-cost, upfront financing in lieu of private debt, especially for projects that include affordable housing units.
  • Priority to buildings with chronic high availability, with development teams having experience in adaptive re-use, with potential for historic tax eligibility, and with vibrant ground level uses to boost neighborhood amenities, such as a grocery store.
  • Technical assistance in navigating regulatory hurdles and funding application processes. 

One Size Does Not Fit All

 For the study, AECOM delved into the three hypothetical projects downtown (at 708 Main, 1021 Main and 1415 Louisiana). The concept analysis looked at building size, acquisition cost, vacancy rates and construction costs.

Houston’s downtown has some underlying nuances. For example, as a newer city, it lacks a deep inventory of the smaller, between-the-wars office buildings that older markets have had some success converting.

And, it has a lot of towers; they account for about 74 percent of the built environment. While many of the buildings are aging, rendering them ripe for some type of repurposing, they aren’t necessarily old enough to qualify for historic tax credits, which are considered an important tool in conversion funding.

Also, the towers are big. About 81 percent have more than 500,000 square feet. This potentially affects the submarket’s ability to absorb all the residential units a conversion would create, the report notes. And their large-scale floor plates – designed for office use, not housing — are another consideration when carving out living space with utilities and amenities.

Meanwhile, downtown’s population density is low, about 11,000 residents. The submarket now has nearly 7,300 residential units, helped in part by a previous Downtown Living Initiative, a tax incentive program of $15,000 per unit that netted 4,728 new units in a series of residential projects, primarily high-end high-rises.

Still, the downtown market’s “appetite” for residential conversion is proven, Larson notes.

A recent example is Elev8, at 1801 Smith by DeBartolo Development. The ‘60s vintage 20-story tower of 458,000 SF has 372 new apartment units.

Other downtown towers with conversion projects announced or considered include:

  • Cameron Management’s project at the Jazz Age era Niels Esperson building and adjacent 1940s Millie Esperson building, converting the pair into a vertical mixed-use tower of apartments capping office and co-working space.
  • Humble Oil building at 800 Bell, a 1.2 million SF 45-story office tower circa 1962 formerly home to Exxon The Exxon building is located about five blocks north of the Pierce Elevated freeway, which is expected to be re-routed and removed as part of the Texas Department of Transportation plan for downtown freeway improvement.

Dec. 20,  2023 Realty News Report Copyright 2023

Photo credit: Cynthia Lescalleet, CALPix copyright 2023

Caption: Humble Oil building Downtown Houston. (circa 1962)  Architecture: Welton Becket and Associates

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File: New Office Conversion Study by Downtown Houston +

 

 

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