Downtown Occupancy Issues Scream Out for Office Conversion

US Downtowns Occupancy Issues Scream out for One Thing: Conversion

With office vacancy rates showing no signs of reversing their downward trend, a greater opportunity arises in major metro markets for conversions.

An interesting phenomenon is happening in some major US cities, especially in the downtown metropolitan cores. Some cities are in the top rungs of population growth over the last half decade, yet their downtown core office vacancy rates continue to decline. Certainly, the Work From Home trend of the COVID pandemic has been attributed to the high vacancy rates in most markets. However, in a few markets where population is on the rise, these vacancy rates have showed no signs of reversal.

Bottleworks District, Indianapolis, Indiana

For example, Houston, Texas, has the highest vacancy rate of all major cities in the US. Yet, the Houston move-ins has ranked 12th and 5th highest in the nation in 2022 and 2023, respectively, signaling a substantial population swing into the market.

Similarly, in Dallas, Texas, the population has grown by almost 100,000 new residents in the DFW metro area between 2020 and 2021 with a similar growth between 2021 and 2022. That growth has continued at a rate over 8% per year. Yet the Dallas downtown metro area continues to have a significant increase in office vacancy. According to D Magazine, a longtime Dallas publication, counties outside of Dallas proper have had the most significant growth driving the increase in population numbers while Dallas County has seen decreases in population. The dynamics of working from an office space in downtown Dallas when there is so much growth outside of the core is certainly driving the vacancy growth rate in this particular market.

Jungclaus-Campbell Company Property, Indianapolis, Indiana

Researchers from the National Bureau of Economic Research, along with New York University and Columbia University, have identified 50 buildings in the DFW metro area that could potentially be converted to residential. In a recent BISNOW article, the researchers pointed to buildings old and new as well as high-rise and low-rise building types. A similar study done for Seattle and a couple of its neighboring cores shows approximately 90 buildings having the potential for conversion into housing.

All can be a consideration and would help to resolve the growing vacancy issue of the overabundance of office space in the market, but would it help the national housing shortage?

Converting an office floorplate to accommodate a residential slate of units is not always optimal. The depths in newer Class A office buildings are typically too deep, and suburban office buildings do not have the style disposition that would attract a tenant looking for any sort of reasonable lifestyle.

The buildings that seem to get the most attention have been the older stock of buildings with smaller and more shallow floorplates, facades with some character and style, and an interior volume that speaks to a higher lifestyle. The challenges often with these buildings are that they lack sufficient adherence to fire and buildings codes that must be updated at higher costs. And certainly, systems such as HVAC and lighting systems have to be updated to meet living and indoor air quality standards.

Conversions take the expertise of architects and engineers that understand and have a track record of restoration and renovation projects to be able to bring some of the most dynamic buildings in our inner cities back to life, not only in the way they appear aesthetically, but also through the vibrancy and livability to create a unique living opportunity. Yet it is not as simple as it seems. The cities need to be prepared to provide tax incentives, parking relaxations, zoning changes, and much more to make projects feasible for developers and property owners. Converting a significant number of buildings in a downtown core takes the entire community working together to bring everything back to life.

Conversions of office space to residential living environments, graced with resident amenities, bring a patrons back to the city to foster community around them. As the Central Business District (CBD) has faded the Central Social District (CSD) emerges and creates a vibrancy that our downtown cores need to bring consumer dollars back into the community of shops, restaurants and entertainment venues that have always had a natural affinity to call major metro downtowns home. These downtown cores have natural walkability that will create a vibrancy that is needed to reinvigorate street life. This reinvigoration creates a cycle of new homes and venues in other existing structures that continue to transform historic downtowns of our great American cities.