Tag: real estate

All across the country, office tower values have been doing their best Humpty Dumpty impression in 2023. 

In Denver, the valuation of Wells Fargo Center (aka the “cash register building”) dropped from $475 million in 2019 to $287 million in 2023. 

The bust is largely due to an office vacancy rate that has remained stubbornly high after the great exodus from offices during the COVID-19 pandemic. Appraisers obviously don’t expect remote workers to come back anytime soon. 

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“In downtown Denver, commercial vacancy rates have stayed around 20 percent for a couple of years now,” says Laura Swartz, communications director for Denver’s Department of Community Planning and Development. “So we’ve looked at our office buildings, particularly these ones with high vacancy rates that are underperforming, and said, ‘Is this a moment where these could become residential buildings instead of residential buildings in the future?’”  

To that end, the city has invested $75,000 of federal funding from the American Rescue Plan Act of 2021 into a study focused on about 30 buildings. Gensler, a San Francisco-based architecture firm, is leading the study. Results are expected in fall 2023, says Jon Gambrill, Gensler principal and co-managing director of the firm’s Denver office. 

The pandemic “may have accelerated this a little bit, but I think a number of cities are going to have a problem at some point in the not-too-distant future, because there are just some buildings that are really old, and there’s always been a tendency for tenants to want to provide better space for their employees,” Gambrill says. 

He points to Calgary as an example. The oil and gas industry, once a major source of tenants for the Alberta city’s office space, significantly trimmed its footprint before the pandemic. 

A dozen projects, 10 of which are supported by the Downtown Calgary Development Incentive Program, will remove more than 1.3 million square feet of office space from the market and create about 1,500 residential units. The program pays grants of up to $75 per square foot to convert office space into residences. “They’re kind of leading the charge for a lot of cities coming out of the pandemic,” Gambrill says. 

Doling out about $86 million in incentives thus far, Calgary’s program has generated nearly $200 million in private investment. 

These kinds of incentives can be critical. “The single biggest challenge is cost,” Gambrill says. Building owners “are still asking more than what can be absorbed into a development cost. Once the value of the building is low enough, you may start to see more people acquiring a building to convert it.” 

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Once a deal is done, the hard work begins. Common construction challenges include meeting modern energy codes (“and how to do that without having to rip out entire mechanical systems and starting over,” Gambrill says) and creating an exterior that’s appropriate for residential use. 

“Here in Denver, there are some exciting conversations that we’re having with the city as it relates to balancing some of the carbon benefits of not demolishing a building to offset some of the required energy goals,” Gambrill notes. “Maybe there’s a win/win there.” 

Tax-increment financing (TIF) can provide another means to spur conversions. In Chicago, Lasalle Street has been hit hard by the exodus of office workers. The city developed a plan last year to add more than 1,000 new residential units to the immediate area by offering developers TIF dollars and other incentives to convert office buildings into apartments and condos. As of mid-2023, the city had selected three concepts that would invest more than $500 million, with about $200 million from the TIF coffers.

Historic preservation tax credits can also help fill the gap, says Aimee Sanborn, principal at Powers Brown Architecture in Denver. Sanborn worked on The National in Dallas when she was with Merriman Anderson Architects. The $460 million conversion of a vacant 52-story office tower to a hotel and apartments was the largest in Texas history. 

The project received Texas Historic Preservation Tax Credits of 25 percent of qualified rehabilitation expenditures as well as Federal Historic Preservation Tax Incentives totaling 45 percent. Many projects also leverage TIF dollars for funding. 

“Texas has a very lucrative program,” says Sanborn, who moved from Dallas to Denver in 2022. “Once it was implemented, you started to see a lot of conversion deals.” 

In Colorado, the corresponding tax credit is 20 percent to 25 percent (or up to 35 percent in rural areas), with a maximum of $1 million a year for three years. “It is much lower and it is capped,” Sanborn says. “I’ve been advocating for a potential increase in the tax credit for Colorado,” Sanborn says. “It is rather low in comparison to other states, and that’s really the only way those deals penciled in Dallas.” 

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The 50-year threshold also doesn’t cover many of the buildings in question. Wells Fargo Center, for instance, won’t turn 50 until 2034. 

Sanborn says that changing the threshold for historic status, along with relaxed energy codes and expedited permitting, could catalyze some conversions. But there’s no silver bullet. “It may be that the costs of the buildings are still too high right now to be feasible” in Denver. 

Gambrill is quick to point out that the strategy can severely limit what you can do. “The problem is some of those conversions become restrictive because of their landmark status,” he says. “You can’t add balconies.” 

Powers Brown is working on a number of office-to-residential conversions now, but none of them are in Colorado. “I’d love to see more momentum,” Sanborn says. “I’d like to do more work locally and not around the country.” 

Not that office-to-residential conversions are a new concept in Colorado. RedPeak Properties converted the 1967 Security Life Building in Denver into luxury apartments at 1600 Glenarm Place in 2006. Denver Housing Authority is converting a former medical office at 655 Broadway into 110 affordable apartments. 

The Nichols Partnership bought the former Art Institute of Colorado building at 1200 Lincoln St. in Denver after it went into receivership in 2019. The residential conversion into the Art Studios, with 192 small apartments, was completed and began leasing in summer 2023. 

“It’s a big project. It’s 10 stories, 100,000 square feet,” says Melissa Rummel, development director for the Denver-based developer. “To be honest, when we bought it, we were thinking of renovating it for an office if we could get a single user in. Boy, are we sure glad we didn’t do that.” 

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Art Studios is the third commercial-to-residential conversion project for the Nichols Partnership, after Turntable Studios, the former Hotel VQ near Empower Field at Mile High, in 2015, and Cruise, just east of downtown Denver, in 2012. 

Rummel says the team has learned to expect the unexpected. “What you encounter on the surface is never what you encounter when you demo and open the whole floor plate up,” she says. Art Studios required “a year of demo and abatement” before the conversion work started. 

“Getting new mechanical, electrical, and plumbing in the buildings is always challenging,” Rummel adds. “We replaced a central system at Art Studios, and we had three elevators taken down to two elevators, then the third shaft was used to run a lot of the extra ductwork and mechanical work. It really is a puzzle in every sense of the word, and I think the most important consultant on the team is the MEP engineer.” 

Certain building shapes work better than others. “Most offices, especially if they’re built in the ’70s or ’80s, are square floor plates, and those are too deep for apartment units. The rectangles that are long and skinny and have shallower floor plates, depth-wise, are better for an apartment layout in a conversion.”

Echoing Gambrill, Rummel says feasibility is inextricably tied to the cost of a project. “You need the basis quite low to actually make a conversion work, because traditionally, it’s the same construction costs as new construction,” she notes. “If you’re having to replace the skin and all of it, you almost have to get it for free to make a project work.”

Rummel sees potential beyond Denver’s urban core. “I don’t think it’s limited to downtown, urban Denver at all. It’s location-driven, and it’s also the vintage of the building and whether it’s three stories or 10 stories.” 

Gambrill points to “intriguing” opportunities in suburban Denver and elsewhere in Colorado with large surface parking lots, but notes, “The shorter the building, the easier it may be to just tear it down.”