More D.C. Developers Eyeing Residential Conversions As City Looks To Reduce Office Vacancy
Owners of older office buildings in D.C. are increasingly considering conversions to residential, a strategy spurred on by incentives from the D.C. government and the high demand for multifamily. The trend could help the city bring down its record-high office vacancy.
Hines, a global real estate giant with a large D.C. office portfolio, is beginning to more seriously consider conversions, Senior Managing Director Andrew McGeorge said March 31 at Bisnow’s The Future of Downtown D.C. & The Golden Triangle event.
"We're certainly looking at them. I think the architectural community has really leaned in to find ways to convert the office workplates to viable residential floor plates," McGeorge said. "We have a lot of buildings here that are short and fat that aren't necessarily conducive to residential, but there are some good examples out there."
McGeorge said he was "excited" by the idea of abatements or incentives for office-to-residential conversion. He said many of the opportunities in the D.C. market come from older buildings that the General Services Administration has vacated.
"We have a lot of commodity GSA space that just isn't marketable anymore," McGeorge said. "So I do think the [conversion] trend will continue, and we’re certainly poking around."
Hines is just one of several office owners that have begun to realize the utility of older office space in office-heavy markets may be declining as demand for multifamily continues to rise in the D.C. region.
The pandemic has accelerated leasing trends within the D.C. office market, pushing the historically supply-heavy office market to record-high vacancies. But a March report from CBRE found that while the D.C. region’s office vacancy rate was above 19%, multifamily vacancy was only at 3.6%.
To take advantage of that imbalance and bring some renewed foot traffic downtown, D.C. Mayor Muriel Bowser has been advocating for additional office conversions, hoping to take more older office buildings offline and bring a greater mix of uses to submarkets like the East End, West End and central business district.
There are some early signs that the District's efforts to incentivize those kinds of conversions will bear fruit. There are 10 Class-B or C buildings totaling more than 2.4M SF slated for conversion, six of which are in the CBD or East End, according to JLL. That includes several residential conversions and Georgetown University’s planned conversion of the office building at 111 Massachusetts Ave. NW for educational uses.
What’s more, some developers have become skeptical office leasing will ever come back to what it was pre-pandemic, and they are taking action to either augment their spaces with high-end amenities or cut their losses.
“Now, if you're not a special property and if you’re a commodity, you're toast,” said Craig Deitelzweig, president and CEO of Marx Realty, at the event.
That has led to more developers launching plans to convert underutilized, aging office space into multifamily.
Foulger-Pratt announced in December it would be converting a 14-story office building at 1425 New York Ave. NW into 255 apartments and Willco is planning its own conversion at 1111 20th St. NW. A partnership of Lincoln Property Co. and Cadillac Fairview is moving forward with plans to convert two downtown office buildings to apartments at 1125 15th St. NW and 1313 L St. NW.
Deputy Mayor for Planning and Economic Development John Falcicchio said anywhere from 2M to 4M SF of office property could be replaced by residential.
Falcicchio said not all of that will be a strict conversion, nodding to the commonly cited issues with floor plates, access to natural light and financial challenges that make some buildings more amenable to a conversion than others.
But he noted the strategy is especially important to restore activity in downtown areas, which he said have struggled during the pandemic more than growing mixed-use neighborhoods like Union Market and Capitol Riverfront.
“When you look at neighborhoods that are more balanced in terms of office and residential, they were able to weather the pandemic better,” Falcicchio said. “For us, yes it's about converting in order to help us take some office offline, but it's also about creating that vibrancy.”
Toward that end, the mayor is backing a new tax abatement tool that would support conversions, particularly in the northern portion of areas like the Golden Triangle and DowntownDC business improvement districts to connect to more residential neighborhoods like Logan Circle to the CBD.
Bowser’s budget proposal for this year also includes $233K “to plan a new residential conversions incentive program,” according to a summary. That is in addition to already approved programs like the District’s Vitality Fund, a $5M initiative to provide grants for rent and tenant improvements for retail in commercial buildings downtown.
“We’re interested in new ideas to think about how we actually create that vibrancy. We’re going to create all this residential but we actually can fill it too,” Falcicchio said.
Analysts studying the D.C. office market say conversions are not a silver bullet to solve the District’s still-rising office vacancy, but will certainly be an important tool in bringing that rate down should they come to fruition.
“With no new construction deliveries, we already saw that change in inventory because of these conversions have a bit of an impact,” said Elsa Wilson, a research analyst at JLL. “So it’s gonna be a really interesting story to continue following throughout the next few months and years to come.”
The downtown market has seen roughly 1.4M SF of office space converted to residential since 2018, according to CBRE Mid-Atlantic Research Director Wei Xie, with up to 3M SF of additional conversions possible.
“I think there are a lot of eyes on that and hopefully that's a trend that's going to materialize,” Xie said. “It's a meaningful chunk of space that could potentially be removed from the office inventory into much-needed housing options for the city.”