With more than 3.8 million square feet of available space as remote and hybrid working take hold, Boston’s Class B office market looks like potentially fertile ground for conversion into thousands of new homes.
But will the developers take the plunge? City officials will take a closer look at multifamily conversions to address the dual specters of a declining central business district and housing affordability crisis. The Boston Planning & Development Agency will commission a feasibility study on the subject this fall, as a downtown zoning study resumes discussions of potentially higher building heights.
For now, interest in office-to-residential projects remains lower in Boston than in most similar cities, said Todd Dundon, principal of Gensler Architects.
“The most important reason is that everyone is more interested in developing labs, where the money is, than residential,” he said.
Beyond the life sciences alternative, developers and architects remain cautious of the hurdles associated with residential conversions. Complications include the difficult layout of older buildings and lots, costly surprises during construction, office lease expiration dates, and additional parking requirements associated with residential use.
Using a proprietary dashboard, Gensler analyzed more than 300 buildings in 25 cities and found that only 30% met its requirements for a housing conversion.
The program analyzes building shapes, floor plate characteristics such as the distance between building cores and the exterior, building envelope characteristics such as window size and operability, and building requirements. use of services, including loading areas and parking.
“That’s where you get into the old heritage buildings where it gets harder,” Dundon said. “A lot of them aren’t complete buildings. They have party walls on either side, which makes it very difficult to maximize units and pencil them out.
Other cities offer conversion grants
Major office-to-residential conversions already announced by developers elsewhere include One Wall Street and 55 Broad St. in Manhattan and the South Temple Tower in Salt Lake City. California’s budget for fiscal years 2023 and 2024 includes $400 million for converting office buildings into affordable housing. In June, Pittsburgh Mayor Ed Gainey offered $2.1 million in funding under the American Rescue Plan Act for office conversions into downtown housing.
Cliff Kensington, director of acquisitions for Brookline-based City Realty, said landlords have to consider long lead times as office leases expire.
“It’s never so clean to have a perfectly vacant building. There are still those one or two tenants scattered all over the place who still have years left on the lease,” Kensington said.
Oleg Uritsky, CEO of Boston-based Helge Capital Real Estate, points to additional parking requirements for multi-family uses as another barrier to conversions.
In January, Boston eliminated on-site parking requirements for 100% affordable housing developments, but did not change the rules for market-rate and mixed-income projects.
And home conversions can bring unpleasant surprises even after approvals and financing are secured.
“Most office buildings are old and once you start opening up the walls, you never know what you’re going to find there. You can find something very difficult that is not planned,” Uritsky said.
Office leasing momentum stagnates in 2022
The rise in office vacancy rates in the first half of 2022 indicates that leasing momentum for commercial tenants has lost momentum after a recovery last fall. The citywide office market has so far seen 777,000 square feet of negative absorption in 2022, according to data from Colliers. And Boston’s Class B office buildings are feeling the brunt of the downturn, with vacancy rates hitting a near-record 22.3% availability rate in the second quarter.
The BPDA will bring the issue to the fore when it commissions a feasibility study on the subject this fall, a spokeswoman said. And recovery of a downtown planning study could lead to higher zoning heights make multi-family projects more attractive to developers in commercial districts.
The Downtown Study covers some of the city’s most densely developed neighborhoods, from the Financial District to the Massachusetts Turnpike. Put on hold during COVID and due to resume after a BPDA downtown planner was hired, it investigated potential rezoning for higher base building heights.
But simply allowing taller buildings won’t necessarily spark a wave of expansion plans, architects and developers say. The potential for vertical expansion of existing buildings is limited by structural issues. Residential conversions require potentially costly upgrades to utilities, elevator clusters, and building envelopes to install operable windows, as required by building codes.
Physical upgrades can bring the cost of conversions to less than 15% of new construction, City Realty’s Kensington estimated.
“It’s not as simple as keeping [office tenants] up and leaning on top,” he said.
Time advantage over building from scratch
But many of these same barriers exist in New York, where architects are seeing growing interest from office owners. The Real Estate Board of New York estimates that office conversions could generate around 14,000 residential units in neighborhoods such as Midtown East, the Garment District and Flatiron.
Developers cut courtyards in the middle of floor plates to create usable housing, said Eugene Flotteron, director of architecture and partner at New York-based architects CetraRuddy. Condominium conversions make up the bulk of the business, as they typically include larger units that move in more easily. Some developers added additional elevator and utility cores, said Flotteron, who estimated such projects cost between $150 and $250 per square foot.
Conversions offer a time advantage, with a typical project taking 12 to 18 months compared to two years for new construction, he said. A growing gap between Class A and B office rents in New York City has forced the hand of many landlords.
“At present [residential conversions] are all in pencil. It comes down to the highest and best utilization, and if they’re not collecting the rents from the new office buildings, it’s worth it,” he said.