Local Officials Support Converting Vacant Office Buildings, But Stop Short Of Offering Incentives
With the DC area's high office vacancy and demand for housing, developers have increasingly begun looking at converting obsolete office properties to residential. Studies have outlined the positive benefits of office conversions for municipalities, such as reducing vacancy rates and growing the tax base, but while local governments aim to ease the process of getting these conversions approved, they remain hesitant to offer incentives to developers.
When The Advisory Board leaves WashREIT's 2445 M St. NW in 2019, the building will be left vacant. On a quarterly earnings call last week, chief operating officer Tom Bakke said the REIT is considering converting the building to other uses, but may need a push from the city.
"If we can get incentives from the city to convert it, that would make it a lot more compelling," Bakke said on the call.
DC Office of the Deputy Mayor for Planning and Economic Development chief of staff Andrew Trueblood said the District is not officially considering any proposal to offer these incentives, but it has heard from parties who both support and oppose the idea and did not rule it out.
"As affordable housing is one of our top concerns," Trueblood said, "a conversion program that helps address the office market challenges while producing housing that is affordable to low and moderate income District residents is something that we would strongly consider."
Many of the District's surrounding counties have studied the benefits of office conversion and see possible upside to offering incentives, but most maintain that having a smooth approvals process is enough to allow developers to go forward with conversions.
One developer who has successfully completed an office to residential conversion said it can be very difficult to find a building with the right floor plates and location to make conversion feasible. EYA saw the former offices of the Sheet Metal Workers International Association, on the banks of the Potomac in Alexandria, and decided to turn it into 60 luxury condos, dubbed The Oronoco.
EYA senior vice president AJ Jackson said Alexandria has a straightforward process and getting the conversion approved was easy. The existing zoning allowed for residential use, and he said the the only issue was making sure they stayed within the density guidelines.
To make sure they could recoup the costs of the conversion and make the numbers work, Jackson said they designed larger units that they could charge top dollar for. The condos range from $1.6M to $4M. He said this type of project did not require seeking any local incentives, but he said it could help make others more feasible.
"For that particular building, it wasn’t something we needed to put into our underwriting, but you may have others where it does make sense," Jackson said. "I could see it in a case where you have area that has stagnated and the city is trying to spur activity."
Alexandria Economic Development CEO Stephanie Landrum said the city has started to pay more attention to office conversions after The Oronoco and with Novus Residential's recent conversion of a vacant office building into a hybrid of residential and commercial space, branded as E-Lofts.
Converting office buildings to residential was previously viewed negatively by many in city government, who wanted to focus on expanding the commercial tax base, but Landrum said she has sought to change that perception.
"What we’ve been able to share is that there are different types; residential comes in different forms," Landrum said. "Luxury apartments and transit-oriented apartments are positive, because we’re creating more opportunities for the workforce and for people to live here, which is what commercial tenants are looking to be around."
With the recent conversion projects, Landrum said Alexandria officials found the city already had a flexible process that easily allowed changing uses. She said having an easy process makes the projects viable, and the city does not need to offer incentives to push these projects along.
"Right now we are seeing the market is supporting the conversions without any intervention by the city," Landrum said. "The incentive we have is that zoning regulations are already flexible."
Another developer who has recently gotten an Alexandria office building approved for a residential conversion, Finmarc principal Neil Markus, agrees that the process was relatively painless. Finmarc received the necessary permits to convert its Waterfront I building to residential, but it now plans to market the property for sale as a residential conversion.
Finmarc owns dozens of suburban office properties — it acquired 26 buildings from First Potomac for $96M last year — and has identified several others for potential residential conversions. Markus said getting cash incentives from cities would make them more likely to go forward with these conversions.
He sees cash incentives as unlikely, so he wants jurisdictions to focus on improving the process, noting that having a building vacant for an extra year while it goes through approvals costs landlords money.
"Just make it easier to work within the system to change zoning classifications," Markus said. "Time is a financial incentive. If you can work a little bit quicker within a jurisdiction, that is a financial incentive."
Novus Residences CEO Robert Seldin, who completed the E-Lofts in Alexandria and is working on another in Fairfax County, also said governments should focus on flexibility in the zoning process.
"We believe that the best incentive that jurisdictions can provide is the freedom to allow owners to succeed by meeting the market as they best see fit," Seldin said. "If this was the standard practice, no other incentives would likely be required."
Montgomery County commissioned an office market study in 2015 that recommended the county encourage conversion of office buildings. It said conversions are beneficial in reducing the vacant office supply and noted that a key reason more of these projects are not done is the challenging economics of conversions.
"Financial incentives could help to improve the feasibility of conversion," the report stated.
Montgomery County Planning deputy director Rose Krasnow said the county has not given any incentives for office conversions, but she said it is one of many things the county is likely to consider as it looks for ways to boost development. She said converting vacant office space to other uses can have many benefits for the county and she would like to help spur conversion projects.
"I would love to be involved in some sort of discussion of just what sort of incentives would it take to make this happen," Krasnow said.
Prince George's County economic development head David Iannucci said he does not foresee the county creating any incentive for developers to convert office to residential, adding that the market will create its own incentives.
While the county encourages office conversion in some cases, Iannucci said the county has actually resisted converting office buildings near Metro, given that it is the county's strongest office product and best chance to attract companies. This was the case with the former CSC building near Metro, which Iannucci said he fought to preserve as office and ultimately landed tech firm 2U for 252k SF.
Gordon said that many vacant and near-vacant office buildings in the county have the potential to produce greater economic benefit if they are converted to other uses, but high costs stand in the way.
"One thing the county has to do is provide an incentive, not necessarily financial, but some sort of incentive for building owners to induce them to want to take on a new project or convert a building, which is not cheap," Gordon said.
He recommended increasing the allowable density for developers willing to take on a converting project, which could make such projects more financially attractive.
Arlington director of real estate investment Marc McCauley said conversion incentives have been talked about internally but have not been brought forward for public discussion.
"From having spent time with developers, the reality is that the ability to convert an old office building into something else has a lot of challenges, and many of the deals just don't pencil, and no incentive would change that," McCauley said. "The greatest incentive we can provide is an efficient and clear process."
Loudoun County economic development director Buddy Rizer said the county has not had any office conversion projects but would be supportive of the idea and would look closely at offering some type of incentive.
"I do think incentives are something that communities should look at," Rizer said. "It doesn’t have to be just financial incentive, maybe it's increasing density or making different decisions on parking or those kinds of things. You’re going into a new use, so sometimes you have to look at different ways to promote this kind of thing."