Cities across the country are thinking about how to turn vacant office buildings into homes, as the rise in remote work leaves more downtown buildings empty, and the nationwide housing crisis continues. At the end of October, even the Biden administration weighed in on the office-to-residential conversion push, releasing a guidebook on how the federal government can help facilitate conversions. A recent study by the architecture firm Gensler found that many of the older office buildings in downtown San Francisco are stronger candidates for conversion than office buildings in other cities in North America. Downtowns are historically the economic engines of our Bay Area cities: important centers for jobs, services, and cultural opportunities, often with good access to public transit. Can vacant office spaces in Silicon Valley be repurposed to help meet our housing shortfall?
Here in Silicon Valley, we have a high number of white-collar jobs that can be performed remotely. We knew this already, with many employers hiring contractors all over the county. Still, the remote and hybrid work coming out of the pandemic has had a significant impact on how we work and use offices. Add to that the recent downsizing at many of the region’s large tech companies, and Silicon Valley has found itself with higher-than-average office vacancy rates: 22.1% for the third quarter of 2023.
The idea of converting older office buildings into housing seems both simple and appealing, addressing a surplus of older office buildings and a housing shortage all at once. In the process, conversion could limit demolition waste, create new homes with less opposition, and renew neighborhoods without dramatically changing how they look from the sidewalk. Proponents say conversion can help revitalize downtowns from a 9-to-5 office hub into a more balanced mix of offices, housing, entertainment, retail, and other amenities. However, the reality of office-to-retail conversion is complex.
What makes an office building feasible to convert? Architecture, Finances & Regulations
The office-to-residential trend can seem like a turnkey solution to combat rising office vacancy rates, but it is not a one-size-fits-all answer. A successful conversion requires a building with appropriate architecture, a feasible financial model, and a regulatory environment that can accommodate the varied issues a conversion is likely to confront.
Many empty office buildings do not meet the architectural requirements developers need for a conversion to make sense. An analysis of the conversion potential of hundreds of office buildings both across North America and specifically in San Francisco, yielded key architectural criteria to consider, including the site of the building, its overall shape, how distant the core of the building is from windows, the window design of the building, and whether it has adequate service infrastructure.
Often, buildings that make the best candidates for office-to-residential conversion are older high-rise offices that tend to have windows that can open, and shorter distances from windows to the core, than newer office buildings. Well-located historic properties, in particular, have been the target of conversions into apartments or condominiums in cities across the US for quite some time. These buildings offer charm, period architecture, and a backstory that cannot be easily replicated in new construction.
Conversion gets much more complex in office buildings built after World War II: air-conditioning and the fluorescent light bulb decoupled office space from the window, enabling floor plates (the total floor area of each story) to become much larger. The interior of the modern office building, which may be useful for windowless meeting rooms, banks of elevators, and supply closets, is not so friendly for apartment living. Many of the windows that do exist do not open. These newer buildings have far more elevators than an apartment building of the same size would need– adding either more expense in conversion or more wasted space. Local planning code and building code requirements can also make it difficult to redevelop an office building into housing. In most cities, bedrooms are required to have access to outdoor light and air, a challenge in buildings with large floor plates.
In many downtown markets, including San Francisco, a modern office building is worth more per square foot in office rent than in apartment rent. Changing buildings from commercial use to residential use can also trigger significant seismic upgrades, and the cost of a substantial seismic retrofit could hinder many projects from moving forward. For some buildings, demolition could become more financially feasible than conversion. Feasibility of conversion can also vary widely from market to market, and some experts believe there are few buildings in the South Bay that would be good candidates for conversion or yield cost savings over demolition.
In March 2023, The New York Times compared how an older, easier-to-convert building was laid out for residential use, and what was required to make a newer, modern office building work as apartments.
Conversion of a circa 1929 office: 1616 Walnut Street, Philadelphia
This 275,000-square-foot 1929 Art Deco office building in Center City Philadelphia was converted into 206 apartments in 2014. The depth of the apartments — about 26 feet — is similar to the old offices. The structural columns affect the location of walls, and the window spacing determines the width of units. Although some apartment shapes are irregular, easy access to windows makes apartment layouts fairly straightforward.
Image: New York Times
Conversion of a modern office building: 180 Water St., New York City
Image: Google Street View
To convert this circa 1970, 457,000-square-foot office building at 180 Water St. in New York City to housing in 2017, the architects had to cut a 1,200-square-foot, 23-story courtyard out of the building (off-center to avoid disturbing too many structural columns) to expand access to light and air. That hole enabled a double-loaded corridor with apartments on both sides, including studios with windows facing into the courtyard.
Image: New York Times
Above, on the left, is the original office floor plan, with windows on three sides and the service core, containing elevators, stairs, and storage along the windowless right wall. On the right is the floor plan following conversion: units are oddly shaped to reach both the interior access corridor and the windows while working around structural columns, and the courtyard view- the only view for some apartments- is somewhat uninspiring.
Image: New York Times
Can office-to-residential conversion be made more feasible?
For projects to be financially feasible, the value generated from rental income needs to be greater than the cost of development, which limits the ability of conversion to serve as a tool for producing affordable housing. With interest rates hitting levels not seen in generations, the cost for a developer to borrow funds to invest has grown exponentially. In neighborhoods with high property values, it is difficult for housing developers to afford to buy an office building, pay to convert it to housing, and then collect high enough rents to turn a profit. Since the onset of the pandemic, construction costs have also risen rapidly. The construction costs of conversion projects, including labor and materials, are estimated to range from $472,000 to $633,000 per unit — without seismic upgrades. Soft costs, including city fees, range from about 20% to 40% of total project development costs. Given today’s costs and potential revenues, a residential conversion could generate less value for the property owner than maintaining the office use, even given high office vacancy. Cities can take steps to reduce costs, making conversion more financially feasible in buildings that are good candidates for conversion.
Several case studies show that incentives have helped accelerate the redevelopment of vacant office buildings into much-needed housing. Calgary offered property owners up to $75 per square foot in grants, resulting in the redevelopment of five buildings and yielding more than 700 units in one year. Chicago offered tax increment financing for conversion projects that make 30% of units affordable, resulting in six project applications. Washington, D.C. introduced a property tax abatement program targeted at conversion projects that make at least 15% of the units affordable. New York’s governor has proposed a partial property tax abatement for office conversions that include affordable housing, and New York City is considering regulatory changes to enable conversions.
Here in California, AB 1532, proposed by Assemblymember Matt Haney in February 2023, could clear the path for conversions “by right,” which skips rezoning and the state’s strict environment review processes, if 10% of the units are affordable and it does not exceed basic height and density limits. Nate Allbee, a legislative aide for Haney, is hopeful but said, “If you talk to developers, this is not something they are clamoring to do. Because it’s actually much cheaper to build a building from the ground up.”
What else should we consider?
Offices and other commercial uses also contribute much-needed revenue to cities through both property taxes and business taxes. The budgets in local jurisdictions depend on having businesses inside city limits for tax revenue, and large-scale conversion projects could impact city budgets at a time when the greater economic environment is already challenging municipal revenue and service delivery.
Offices have a much higher density of occupancy than residential buildings. Instead of a thousand people working in a building, conversion would result in a few hundred people living there. Replacing the office space with residences would lead to more people at night and on weekends in the area than an office would bring, but likely far less weekday activity. Downtowns contain a complex ecosystem of lunch providers, small businesses, and other services that support the existing system, employing another multitude of lower-wage but no less essential workers. Conversion strategies would need to account for these larger ecosystem issues.
Are developers interested in conversion in the South Bay?
Owners of several properties in San Jose are exploring conversion. At the nine-story St. James Plaza office building at 152 North 3rd St. in Downtown San Jose, owners are considering redeveloping the property for housing, according to Alex Stettinski, chief executive of the San Jose Downtown Association. Although this class B multi-tenant office building was constructed in 1986, it is fronted by the entry portico, with architecturally distinctive Doric columns, of the 1906 building original to the site. The long, narrow proportions of the lot yield floor plates with more natural light than is typical for the building’s vintage.
San Jose State University, meanwhile, is planning for mixed-use development at nearby Alfred E. Alquist State Office Building at 100 Paseo de San Antonio, with up to 1,200 homes for faculty and staff. SJSU has issued a Request for Qualifications (RFQ) to measure developer interest in the project and screen potential developer candidates for a Request for Proposals (RFP) to be issued in the fall of 2023. Due to its low-slung architecture, the existing building would likely need to be demolished to make way for new development, rather than repurposed as housing.
Owners of a 10-story high-rise at the intersection of First and Santa Clara streets, originally built in 1910, are considering conversion to multifamily residential, co-living residential, or hotel. The Downtown San Jose building just underwent an extensive renovation and modernization in 2020 to an open floor plan office. The building’s relatively small floor plates could allow for remodeling into apartments with abundant natural light, but any housing created by converting this building would likely need to be priced to recoup the costs of not one, but two redevelopments.
Where do we go from here?
Most of Silicon Valley’s older office stock was built in the post-war years when the expansion of the tech industry accelerated rapidly and yielded office buildings that may be more challenging and expensive to convert. A large proportion of this office stock is in 1-2 story, low-density office parks that yield relatively little useful built space for conversion, but even in our downtowns, few buildings meet the criteria for conversion. That makes the cost of converting most office buildings to apartments prohibitive in the South Bay. At best, it is likely to yield only expensive market-rate units because of the high cost of conversion.
In markets where architecturally feasible vacant office buildings are prevalent, tax abatement, tax subsidy, and fee reductions or waivers have shown promise in helping conversion to residential uses achieve feasibility. However, the low-rise form of the vast majority of the South Bay’s older office stock means that the most effective way to convert these parcels to housing remains demolition and redevelopment. Many South Bay cities have been using this strategy to successfully convert commercial zones in transit corridors to housing and mixed uses in recent years, increasing height and density. This strategy offers another way of thinking about the conversion of office lands to housing that makes sense in Silicon Valley and is actively underway.
Wall Street Journal: How to Convert Empty Offices Into Luxury Apartments | WSJ