The real estate trend could be a boon for downtowns

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Office-to-residential conversions are sparking interest from developers in US cities, despite hurdles related to seismic upgrade requirements and zoning revisions for historic buildings. Although developers are exploring opportunities in Portland, no conversions have yet been made in the city.

executionerThe 2024 design forecast shows that underperforming office building conversions are trending this year. Cities like Portland are in desperate need of housing, said Maurice Reid, co-director of the studio in Gensler’s Portland office. Many city centers have plenty of office space and could see an increase in distressed property sales this year.

In national and international surveys, Gensler has found that people want to be downtown, but in vibrant, mixed-use environments. As cities look for ways to activate their downtowns, Gensler has studied how office buildings can be converted into residential ones.

“Not every building will be suitable (for conversion),” Reid said. “From a developer’s point of view, you would want to identify the most appropriate, the most advantageous, so that you don’t waste money, time or effort.”

About 20-25 percent of buildings in a typical commercial business district are suitable for renovation from office use to residential use, Reid said.

Gensler has developed a computer algorithm evaluation tool to determine the suitability of buildings for conversions. Employees enter about 80 different characteristics of a building, and the tool gives the building or property a score, Reid said. A score of 80-100 is worth considering. The tool takes into account building size, construction type, window distribution, floor-to-ceiling height and floor slab dimensions and whether it would be suitable for apartments.

Gensler has completed two conversion projects (A Franklin Tower in Philadelphia and The Residences at Rivermark in Baton Rouge, Louisiana) and is working on another (1 St. Clair West in Toronto, Canada).

However, those projects did not have the seismic requirements that exist on the West Coast, Reid added. A seismic upgrade can account for about a third of the cost of a renovation, he said.

The Residences at Rivermark, in Baton Rouge, Louisiana, was previously an office building. (Ryan Gobuty/Courtesy of Gensler)

The broad cost estimate for a conversion in Portland is about $350 per square foot, Reid said, plus the cost of buying the property unless the developer already owns it.

Right now, in Portland and other West Coast cities, conversions don’t make financial sense for investors. Reid hasn’t seen anyone go ahead with an office conversion project anywhere on the West Coast, he said.

In March 2023, Portland City Council passed two ordinances regarding office-to-residential conversion. An ordinance provides a limited exemption for system development charges (SDC) when conversions of commercial to residential buildings include seismic retrofits. The waiver amount is limited to the cost of the seismic retrofit or $3 million, whichever is less, and expires in July 2027.

A second ordinance changed the seismic design requirements for office-to-residential conversions to meet American Society of Civil EngineersStandard 41-BPOE (Basic Performance Objective for Existing Buildings). The permanent amendment amends the city building code to change the seismic improvement standard that a residential conversion must meet, consistent with the city and county building code.

Two other recent policy changes, focused on housing production in general, are the Housing Regulatory Assistance Project, policies of which took effect on March 1, and a 24-month deferral of SDCs for new units of housing authorized by the Portland City Council last year.

Ken Ray, spokesman for Portland Bureau of Developmental Services (BDS), stated in an email that the bureau has seen a lot of interest in office-to-residential conversions, but none have yet made it to the permitting stage. However, preliminary meetings for two projects are underway with the permit services team, he added.

Those projects are for a possible conversion of the upper floors of the building at 317 SW Sixth Ave., and another of a historic building at 220 NW Second Ave. BDS anticipates that permit applications will be submitted for the projects sometime this year, Ray said.

Some of the restrictions on applicants, according to Ray, are seismic requirements and some land use requirements. Many of the older buildings in the city need significant seismic upgrades, which are still too expensive for most developers. Also, many are historic buildings that require a historic design review. BDS has met frequently with project teams to try to offer solutions, but none have considered the applicants financially, Ray said.

Meanwhile, in Canada, conversions are progressing. About three years ago, Gensler conducted a suitability analysis for 6 million square feet of office space between multiple buildings in Calgary, Alberta. The city then awarded direct grants to developers to bridge financial gaps for the conversions. Five office conversion projects are under construction in Calgary and another 10 are under development, Reid said.

According to Gensler’s prediction, office-focused downtowns are becoming a thing of the past and will become mixed-use collections of retail, entertainment, sports, housing and other lifestyle-anchored developments.

Mixed-use buildings are booming in places like Portland, Reid said. The Ritz-Carlton, for example, has residences, a hotel, offices, restaurants, conference space and more. Such buildings that offer a variety of services are more likely to attract rents in a highly competitive market, he said.

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