8 Reasons Office Conversions Are Rare

Article originally posted on HERE on April 14, 2023

When you walk into The National in downtown Dallas, there’s a greeting table for an upstairs restaurant that offers guests a glass of champagne to prep them for their 40-story ride to dinner. Keep walking, and you’re in the lobby of a luxury hotel. Jump in the elevators and head up a few stories, you’re in the luxury residential zone.

The building is a testament to the possibilities of office conversions—a bank tower that sat vacant in the heart of downtown for more than a decade before a drastic reinvention that drew life back to the core. As downtowns across the country begin to come to terms with soaring vacancies and the promise of worse to come as workers dig into their work-from-home lifestyles, the cries for office conversion grow louder.

Will developers rescue downtowns? It’s complicated. The National’s conversion cost nearly half a billion dollars, but cost alone isn’t the only deterrent, as Zonda has advised developers in the past and continues to remind current clients.

Several factors determine whether an office tower is a likely conversion. Any of these elements can make or break a project, but if you start measuring the variables, you begin to see just how difficult it is to make the math work on a conversion.

1. Heritage status: Starting with a positive—everyone loves a heritage building. You’ll be able to command higher rents if your building has a bit of history attached to it, as opposed to a nondescript three-story block of office space.

2. Building height: Nobody wants to move into a former office building to live on the second floor. The higher the floor, the more likely landlords will be able to charge full market rent (or even a little bit more) for their units. Short and squat? Expect less rent.

3. Ceiling height: Ceilings are a big deal, and many office buildings across the country were built with 8-foot ceilings. That’s a big problem for landlords, especially because new-build construction regularly offers 10-foot ceilings in their basic packages. Lower ceilings? Lower rent.

4. Balconies: Look around any office tower in any downtown across America, and you’re not likely to see anyone flopped out in a hammock on their breezy balcony. An outdoor escape, no matter the size, can command higher rents. This is so important that some developers have added them retroactively to achieve the returns they need to make the project work.

5. Windows: Many office buildings—especially older ones—have small-to-medium windows that let in minimal light. Large windows are rent-neutral—residents expect there to be light. Smaller windows? Expect to get less.

6. Elevators: Elevators are usually a net positive; office buildings have more elevators than your typical residential tower. Any more than three will be considered a bonus, leading to higher returns.

7. Parking: If there’s a deal breaker, it’s usually parking. Parking is off-site and charged separately at many sites, so it doesn’t affect rent. But being off-site comes with a different cost—nobody wants to park their car and then go for a walk to get home (especially in a redeveloping downtown). When you put this scenario up against a new building with parking included, the new building wins every time.

8. Uses: The National works because of its mix of residential and hotel—two complementary uses. Amenities such as swimming pools and workout areas can be shared. But nothing turns off prospective residents or owners as much as office workers crowding their elevators and hanging out in their lobby.

Any of these elements on their own isn’t likely to make or break a project, but if you start measuring the variables, you begin to see just how difficult it is to make the math work on a conversion.

Impossible? No.

More difficult than assumed? Absolutely.