The Case for Incentivizing Office-to-Residential

If you have been to downtown Denver recently, you likely noticed there are still fewer people around now than before March 2020. It has been nearly impossible to not directly experience the negative effects of the pandemic on our downtown.?Vacancy, safety, affordability, and homelessness are all very real issues that will require innovative policy solutions rooted in compromise and commitment from our politicians and citizens alike. While these challenges are vital to solve in the immediate future, it is equally important to have a long-term vision for our city, its continued growth, and evolution into a world class destination for businesses, families, and a place that provides prosperity for those who have lived here for generations.?

From 1990 to 2021, Denver’s population has increased 52% overall, with downtown Denver doubling in the past 10 years alone. Looking forward, ESRI projects the population of Denver will grow 7% annually through 2027. Within this context, housing is quite clearly one of our greatest challenges as a city, particularly for downtown. The need for more housing is also one of our greatest opportunities to create solutions that not only address the housing shortage but in doing so, strengthen Denver’s urban fabric through innovative solutions.?

While Denver has a shortage of housing, it has the opposite problem with office space. Though many indicators of a healthy economy, such as travel, have largely returned to pre-pandemic levels, the vacancy rate of office buildings has remained stubbornly high—21.7% across the Denver metro area, according to JLL (Office Insight Q2 2023). The impact is not being felt consistently across the commercial office market, with some buildings almost completely empty while others have primarily maintained their tenancy. The causes of this vacancy are complex, so for the purposes of this discussion we will focus on two overall trends driving high, uneven vacancy across the Denver office market: the pandemic-triggered shift in working habits and a "flight to quality" from aging, legacy buildings to newer, more modern buildings. The first trend will likely shift over time with more people returning to the office but may never fully return to the pre-pandemic levels given the revelations that virtual and hybrid work habits can now be accommodated with the incredible technological innovation provided by tools such as Zoom, Teams, and cloud servers. The bigger issue is the second trend, which is the ever-growing stock of new class A office towers being built in Denver. In the central business district alone, there is approximately 1.7 million sf of office under development. These new offerings bring state-of-the-art building infrastructure, gleaming facades, and enhanced amenities that will only continue to create an increasingly difficult competitive environment for older office buildings, particularly those from the mid to late 20th century.?

Denver has an entire generation of office building stock that was born out of the oil boom of the late 70’s/early 80’s that is challenged to be competitive in the amenity driven office market. Yet these legacy buildings are actually quite young relative to their true architectural lifespan, many of which could stand for another 50 to 100 years with proper maintenance. This is important because the amount of embodied carbon (the carbon footprint expended to build the building) in each of these structures is enormous, and demolition is not only economically impractical, but environmentally irresponsible. The “appeal lifespan” of a building is often a fraction of its true lifespan as a structure. Renovations can do a lot to refresh or reposition a building’s attractiveness in the market. However, there is also the potential to re-imagine a building’s primary function as something entirely different and more attuned to the needs of the market. Given that Denver has a large amount of struggling B and C class office buildings, with a bit of ingenuity, we see many candidates for office to residential conversion. This type of building transformation is not a one size fits all solution but does offer an intriguing, and viable, way to increase housing availability in areas often lacking it, downtown areas. Aligning office vacancies with housing shortage seems like a no-brainer strategy on the surface (and in some ways it is) but it requires careful assessment and consideration. This type of feasibility analysis is what we (Gensler) have been doing throughout the United States and Canada.?

Gensler has developed a proprietary building rating system and cost model to assess vacant office building compatibility for adaptive reuse, conversion, and redevelopment. To date, Gensler has assessed over 152 million square feet of office space in more than 900 buildings in 25 different cities across North America. Gensler worked with developers and city planners to create the tool to quickly review existing office buildings and determine if they are compatible with multifamily conversions. The tool's multiple criteria include site context, building form, floor plate, building envelope, and servicing. We can evaluate assets quickly and draw rapid conclusions about the initial suitability of transforming office buildings into housing. The system has been developed to align with a developer's pro-forma or business model for a project. Elements of the existing building that would increase construction costs are weighted heavily, but so are elements that would increase the rental or sale value, such as well-balanced unit proportions and access to natural light.?

Every building is unique, and there is no one straightforward way to create a successful project. What we have seen in our study across multiple markets is that many buildings will likely not be suitable for conversion due to existing conditions such as floorplate geometry or lack of access to daylight as well as the local real estate market investment returns not able to support the financial cost. Converting from office to residential use involves substantially re-working a building's architectural functions. Despite the challenges, projects around the country have demonstrated how conversions can successfully transform empty office buildings into thriving residential communities in markets such as Philadelphia, New York, Calgary, Baton Rouge, and Washington DC.??

The success of conversion projects ultimately depends on how the economics can support the project. In examples such as Franklin Tower in Philadelphia, the residential market rental rates supported a conversion budget that included an all-new curtainwall system with integrated balconies. Not all markets offer the favorable dynamic of higher residential rent rates compared office lease rates. For example, in Calgary, the downtown area had been experiencing a prolonged issue with office vacancies well before the pandemic and the government wanted to encourage conversions from office to residential. Gensler worked with the city through their Economic Development group to analyze downtown office-to-residential opportunities over the past few years and to date the city has seen a boom in conversions throughout downtown Calgary. Part of Calgary's success in implementing office-to-residential conversions has been the city's action on streamlining policy (planning approvals in as little as 30 days) and providing financial incentives to developers (approximately U.S. $50/sf) to convert offices to residential buildings. These bold investments by Calgary in private development acknowledged the importance of partnering with commercial development to incentivize viable projects that do not have to rely on catering to just higher rental markets, aka “luxury,” to make the project pencil. With financial support from the local government, these repurposed and revitalized buildings can serve a wide range of income levels as well as expand Calgary’s tax base to return the investment back to the city over time.?

Many cities across the United States are currently considering a range of incentive programs to encourage conversions. In Washington DC, these efforts began before the pandemic with the Office to Affordable Housing Task Force Establishment Act of 2018 that commissioned a task force to assess the viability of converting vacant office space to affordable housing. The conclusion of that task force in 2019 was that government subsidies would be needed to encourage the conversions. In Chicago, where the downtown population has doubled since 2000, the government is actively exploring multiple avenues to support conversions such as state and federal tax credits, property tax incentives, and funding from the LaSalle/Central Tax Increment Financing District to subsidize private development.?

We see a similar opportunity in Denver to look ahead 10+ years and ask ourselves what do we want for our great city? The city has made strides towards improving access to housing and fostering a vibrant public realm by adopting sweeping new policies such as Expanding Housing Affordability and rethinking the city street through pilot projects at Larimer Square and Glenarm Place. How can we continue to guide Denver’s development towards a vibrant, resilient, and equitable city where more people can live near ample access to food, education, and employment opportunities? We believe an incredible and timely opportunity exists in transforming suitable class B and C office buildings to residential to create this active, healthy, mixed-use and mixed-income urban fabric we would all love to see downtown. It will take all of us in the Denver community to make this a reality and now is the critical time to focus on how to make these conversions happen to transform the future of Denver.?