Denver’s mayoral candidates, as well as Mayor Michael Hancock’s administration, have emphasized converting underused office buildings into apartments or condos as an important way to address the city’s housing shortfall and revitalize the downtown area.
The idea represents a “kill two birds with one stone” solution. The pandemic reduced the number of people working in offices, which has caused vacancy rates to soar and mortgage loans to go into default. At the same time, Denver has struggled with some of the biggest home price and rent gains seen in any city outside of California.
“While many employers have embraced hybrid work policies, commercial offices are unlikely to return fully to the way they were pre-pandemic. The city believes there is an opportunity here to help create a more complete neighborhood downtown with more housing options by focusing on vacant commercial and office space,” said Laura Swartz, communications director for Denver’s Community Planning and Development.
Denver is spending $75,000 for a feasibility study to look at reusing up to 30 buildings downtown, primarily underperforming office buildings. The study will look at floor plate sizes, mechanical systems, and proximity to transit, to determine whether a residential conversion is practical or not, she said.
For property owners who have self-identified conversion candidates, the city has created a pilot program to provide them with dedicated one-on-one staff support to get them through the process.
“We are trying to remove as many barriers as is reasonable for these types of projects while prioritizing the safe and sustainable reuse of our existing building stock,” she said.
Kelly Brough and Mike Johnston, the two mayoral candidates who have raised the most money so far, have spotlighted adaptive reuse in their campaigns, and so too have Leslie Herrod and others.
“We will aggressively work to transition vacant and underutilized office space into residential options and other needed uses, like child care facilities. This strategy can simultaneously make downtown more vibrant, more affordable and more competitive for jobs,” Brough’s platform states.
Whoever the next mayor is, they will likely put a big emphasis on adaptive reuse, and it is expected that buyers of the now-distressed buildings will as well.
“Adaptive reuse and office diversion is a significant opportunity for Denver. Lots of people are interested in being involved in figuring it out,” said Bob Pertierra, a senior vice president of economic development with the Downtown Denver Partnership, one of the groups helping the city with its study.
The DDP, through its surveys, estimates that Monday to Friday foot traffic in downtown Denver is at just over half, 54%, of what it was before the pandemic. Bringing in residents to replace the office workers who are now staying at home would revitalize the downtown, creating more activity day and night, Pertierra said.
Nearly 30% of the office space in downtown Denver was sitting vacant at the end of last year, with the vacancy space for older Class B space running above 35%, according to Newmark, a commercial real estate firm.
Vacancies are expected to rise as more tenants let go of space they don’t need or don’t renew when leases come up. Two of Denver’s signature skyscrapers, Republic Plaza and Wells Fargo Center, are under special servicing, which occurs when a borrower gets behind on loan payments and the lender takes over building management.
About 10% of Denver’s office buildings have debt coming due this year, with nearly a quarter seeing a maturity over the next three years, according to a report from CommercialEdge. Denver is one of the three most debt-stressed office markets in the country along with Atlanta and Portland, Ore. Landlords who have managed to limp along face a reckoning.
And while the region may be oversupplied when it comes to office, it remains underbuilt in housing. Colorado has a shortfall of 62,000 homes given its population growth, making it the seventh most underproduced state for housing, according to Up for Growth, a group that seeks to create more affordable housing.
Are conversions feasible or a fantasy?
Up for Growth studied Denver’s situation to determine how much office space could reasonably convert into residential given the costs involved, and the results weren’t as promising as what backers of adaptive reuse might be hoping for.
Out of 208 office buildings in Denver’s Central Business District, only five were deemed convertible to residential, accounting for around 6% of the vacant office space at the end of last year and far below the 30 candidates the city is reviewing. Viewed another way, only 1.5 million square feet of the 27.2 million square feet of rentable office space sitting vacant could convert, the study estimated.
“Just because the number is low right now doesn’t mean it will remain low,” said Anjali Koachalam, a policy manager at Up for Growth and the study’s author. “I and others in the housing space expect this number to rise.”
The study weeded out the buildings built after 2010, given the preference of commercial tenants for newer spaces. It also eliminated buildings under five stories and those with vacancy rates below 25%. Floor plates had to be greater than 5,000 square feet and the depth of the building had to be between 30 feet and 80 feet. Anything wider creates skinny “tunnel” apartments that wouldn’t be marketable or that if trimmed, would waste a lot of interior space.
Reuse candidates could rise with higher vacancy rates and more foreclosures, which seems where things are headed. As architects and developers gain expertise in the conversion process, costs could come down and confidence could go up. If cities ease up on zoning restrictions and code requirements, and extend incentives, that could help.
Federal and local incentives will likely need to become part of the mix, Koachalam said. The stalled Revitalizing Downtowns Act of 2021 proposes a 20% federal tax credit for office building conversions and more cities are chipping in incentives of their own, something Denver may likely consider at some point.
Older and smaller office buildings, those built before World War II, are among the best conversion candidates, given their floor design, Koachalam said. So too are hotels, which are set up like apartments with individual rooms. But neither line up with the buildings that city leaders most want to see converted — the big skyscrapers built in the 1980s and 1990s that have emptied out, the ones that will be a pain to deal with if a second life isn’t found for them.
“It won’t be the majority of buildings that would work, it would be a subset and I don’t know what the actual number is,” Pertierra said.
Obstacles from top to bottom
Although converting a big building can be cheaper than tearing it down and starting over, the hurdles developers face are numerous.
Standard apartments run around 30 feet in length, but larger office buildings, the kind built in the ’80s and ’90s, have wide floor plates that result in skinny units stretching 45 feet or more. Depths could be kept to standard sizes, but that would waste a lot of interior space. One option would be to hollow out building cores to create light shafts for interior spaces, but that approach will fall short with taller buildings and isn’t cheap to do.
Denver doesn’t require that the windows in residential high-rises be operable, meaning they can be opened and closed, which is a big help when it comes to converting buildings with glass skins rather than individual windows. But even if Denver took it a step further and eliminated windows, not likely, the units probably wouldn’t be marketable.
A trade-off for buildings without operable windows is that they must have adequate escape routes. Most building codes require multi-story, multi-family units to be within 100 feet of an emergency stairway. Office buildings typically only have one stairwell and adding a second one would be too costly in many cases, according to Up for Growth.
Another big cost in conversions is the need to replumb every new unit for a bathroom and kitchen. Most office buildings have shared bathroom facilities on each floor, typically toward the center, and not in the areas people would be living. Submetering is another added cost, given that most apartment tenants prefer not to pay for wasteful neighbors. They want their utilities tracked separately.
Even if a project pencils out on paper, meaning the future rents could cover the purchase price and conversion costs, there is always the problem of surprises, the bane of any renovation project. Once walls are opened up, there can be all kinds of unexpected issues, such as asbestos or mold.
While not easy to pull off, adaptive reuses are happening at an accelerating rate. Nationally, the U.S. saw 11,000 apartments created from converted commercial space over the past two years with another 77,000 underway this year — about as many conversions seen during the prior decade, according to a study in December from RentCafe.
“Not all buildings are equally threatened by the work-from-home revolution. Larger office buildings in abandoned central business districts are better suited to conversion than the often-smaller office complexes distributed around the suburbs,” said Doug Ressler, manager of business intelligence at Yardi Matrix, in comments accompanying the study.
Despite the buzz around office building conversions, only three recently completed ones come to mind, and they have been with smaller buildings in the suburbs, not downtown, said Scott Rathburn, president at Denver-based Apartment Appraisers & Consultants, which keeps a close eye on multi-family trends in the state. Lakewood has seen more action on that front than Denver in the past couple of years.
Rathburn said the metro area’s 5.6% apartment vacancy rate indicates the market is in a stable place, provided it can continue to pump out new units at the strong rate seen in recent years. Where office conversions could help is in providing more affordable units, which remain in short supply, and one way to make office building conversions more efficient might be to pursue a more communal model with shared bathrooms and kitchen spaces in the interior.
Art Studios
One of Denver’s most notable office-to-residential conversions, 1600 Glenarm, created 333 apartments out of the Security Life Building in 2006. The building, constructed in 1967, sat in limbo for nearly a decade as prior developers tried and failed to find a viable use for it, including as a hotel. A key constraint was parking, which was resolved with the purchase of a nearby surface lot.
The latest big adaptive reuse about to hit the market with 192 apartments is Art Studios, which is filling the space once occupied by the Art Institute of Denver at 1200 Lincoln St. The former school was itself an adaptive reuse of the Western Farm Life Building constructed in the early 1960s in the Golden Triangle neighborhood. The third act, Art Studios, is incorporating leftover equipment and studio space from the school with makers rooms for tenants who want to paint or play instruments.
Two potential buyers backed out of a building purchase because of asbestos problems, which allowed the Nicholas Partnership to step in and begin renovations in 2019 with an opening set for June.
“It was a long, arduous process to get it through. You find new things the deeper you get into the building, more and more unknowns come up,” said Melissa Rummel, development director at Nicholas Partnership, which also converted Turntable Studios near Empower Field from a hotel to studio apartments.
While most office buildings have a problem with too much floor space versus window access, the Western Farm Life Building had a narrower floor plate, resulting in units that maxed out at 23.5 feet deep, Rummel said. All but two units are studios ranging from 245 to 374 square feet, which is on the tiny side. But for renters who don’t need much room, the trade-off are rents of $1,350 to $1,500 a month, which are hard to find in Denver.
A major change was adding operable windows, something that tenants prefer, Rummel said. Art Studios cost more than anticipated but remained financially viable because rents rose even more.
Rummel said the project was a puzzle that required creativity to solve, but it preserved a distinctive building and will provide affordable housing that Denver desperately needs without the use of tax credits.
“The office market has changed forever and new uses need to be found for these older buildings,” she said. “It needs to be done to bring people back to our downtown. We need to increase our vitality.”
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