Office Value Plunge Opens Door For New Conversion Play: Self-Storage

For decades, a four-story brick building in the Glenforest neighborhood of Raleigh, North Carolina, served as a call center for AT&T. 

But next month, it will open as a self-storage facility for people to keep old newspaper clippings, couches and teddy bears.

The project is Tourbineau Real Estate Partners’ first office-to-self-storage conversion, and the company is on the precipice of taking that model national, with six more in the pipeline — focusing on urban districts with vacant office space.

“We've seen, anecdotally, a lot of these urban governments and community groups finally understand that these buildings aren't really going to become anything else,” said Tourbineau Chief Investment Officer Ben Wong.

As the real estate market contends with a growing glut of obsolete office stock, residential conversions have been a hot strategy: 12.8M SF of such projects are expected to deliver this year. But apartments won’t be the cure-all for vacant office space, and industry discussions are now expanding to new uses. 

One option becoming increasingly viable is transforming office buildings into self-storage. As office values dip lower and self-storage demand and values grow — the sector’s average sale price nationwide rose 31% year-over-year in the first quarter — swapping out these two asset classes is increasingly on owners’ minds.

“I think what self-storage represents is an invaluable future use with a specific demand need that we can see coming from demographic data and from supply,” Avison Young Vice President Joe French, who heads the brokerage’s mid-Atlantic “office to anything” team, told Bisnow. 

Two types of office-to-self-storage repositionings are occurring: demolitions for ground-up self-storage buildings and conversions that keep the old building intact.

Self-storage conversions will largely be relegated to urban areas where structures are already ingrained in the fabric of the city, and demolition plays will be targeted in suburban markets where razing and redeveloping a building is likely the most cost-effective option to get the most bang for your buck, experts told Bisnow. 

But both options are only viable because of the deteriorating values in the office sector for older and less desirable properties. Nationwide, office prices had fallen 23% over the last three years as of April, according to MSCI. 

There is a reason the go-to solution for an office conversion is apartment units or hotel rooms: the income those uses can generate justifies the cost of purchasing the land, entitling it and building it out.

But self-storage rents are typically much lower than office rents, meaning the ultimate property value will be lower.

“So the only reason that you could be able to do that is because the starting point of the office purchase is very, very low,” Wong said. 

On top of the cost problem, zoning and structural issues can make self-storage conversions and replacements difficult. 

Anthony Piscitelli, senior vice president of investment at self-storage developer Arcland Property Co., said basis, structure and zoning are the three hurdles these conversions must overcome. He said of the 50 to 60 office-to-self-storage repositioning pitches that companies have brought to Arcland since the pandemic, they have only completed a few — all demolitions. 

Arcland is undertaking one such effort in Montgomery County, Maryland. It is under contract to purchase 11900 Parklawn Drive, a largely vacant 1970s-era building that it is getting approval from the county to demolish and replace with a 105K SF, three-story self-storage building.

Other companies, like Tourbineau, are looking to pursue the conversion strategy where they can. 

In addition to its Raleigh project, Tourbineau has acquired three office buildings in Oklahoma City, San Francisco and Seattle for self-storage conversion, and it has three more under contract in Silver Spring, Maryland, Honolulu and Sacramento, California.

It is a national play for a reason, Wong said: The opportunities are few and far between. 

“There might be only one in a market every once in a while that actually could pencil,” he said.

French conservatively estimated that between 5% and 7% of the office stock coming offline could be converted to self-storage. 

One of the big hurdles is that communities need self-storage but don’t want it in their backyards. Neighbors would rather have a new grocery store or mall. 

“Developers like us and investors like us especially have to make a bet that we can convince the county or sometimes the neighborhood or city council,” Wong said. “It just depends who you have to convince to allow us to do so.

“And the way we've had success so far is we've convinced them that there's no alternative.”

For its planned project in Silver Spring, Tourbineau needed the Montgomery County Council to pass a new zoning amendment. 

The amendment, which passed unanimously in April, allows self-storage on the upper levels of an office building if it has been more than 90% vacant for at least two years — and if the owner agrees to put a nonprofit use on the ground floor. 

The developer has now put the Silver Spring office building under contract and is planning to house a Montgomery County community group on the ground floor.

Montgomery County Councilmember Andrew Friedson, who co-sponsored the zoning amendment, confirmed to Bisnow that it was intended to move that specific project forward. 

“On the one hand, self-storage is not the most attractive reuse of an office building for an urban setting where you want vibrancy and you want street activation. … But in certain circumstances, to adaptively reuse and convert a vacant office that is a scourge on the community into something that is more productive and provides a public benefit by providing space to local nonprofits, there are opportunities for win-wins,” Friedson said. 

Tourbineau has promised similar community benefits for its other planned self-storage conversions. In Seattle, it has promised to incorporate artwork on the ground floor, and in San Francisco, it is building out its ground-floor space for use by a local ethnic community group. 

“There's this general feeling in these areas that generally don't allow self-storage that if we're going to allow you to do this, you can do it on the upper floors,” Wong said. “We want the ground level to stay or be activated in some level so that average people walking around still feel like this is an activated property.” 

Conversions also face structural challenges that demolition projects don't present. Self-storage needs specific loading and weight-bearing capacity and has specific requirements around building size. 

Few office buildings wouldn’t need structural remediation before they could carry the loads self-storage facilities need to, BWDArchitects partner Rebekah Brown told Bisnow.

“Every once in a while, you'll find a building that has a higher live load design, which we call those diamonds for you, because it means you won't have to do any structural upgrades,” she said.

Pikesville, Maryland-based Sage Ventures has converted two office buildings just north of Baltimore into self-storage, Moshe Crane, the company’s vice president of branding and strategic initiatives, told Bisnow.

One was a 100K SF half-finished office building that had sat vacant for two decades. The firm purchased the property a few years back, and it is now an 800-unit, fully leased self-storage facility managed by Extra Space Storage. 

It just opened the second, a 60K SF vacant property that it purchased at auction.

“These two buildings that we converted were very, you know, conducive for that — fairly large floor plates,” he said. “One is two stories, one is four stories, and very symmetrical. They’re very rectangular.”

Meanwhile, French and his team are in the process of advising half a dozen office landlords in Fairfax County, Virginia — the nation’s second-largest suburban office submarket — on self-storage conversion options for their buildings.

“I think it's a real once-in-a-cycle opportunity,” French said.

“We've got capital that is really convinced of the upside, and it is informing developers and operators, really sponsors of these deals, that they've got the green light to take some chances.”