In today's market, it's easier to sell condos or rent apartments than it is to lease office space—and multifamily developers are taking note.
So are commercial property owners, tired of empty office suites. “Any underutilized building is a candidate for adaptive reuse,” according to Paul Ticher, a partner at Cox, Castle & Nicholson, a Los Angeles law firm that has advised numerous adaptive reuse projects. “Commercial owners think like commercial owners, but they need to think of other alternatives now.”
In cities such as Dallas, Minneapolis, New York, Philadelphia, and others, those alternatives include transforming empty office buildings into apartment and condo properties. “Ask yourself, ‘Would anybody want to live in this neighborhood?'” Ticher says. If the answer is yes, that's a very good place to start.
It isn't always where you might expect. While “a building in a constrained, 24-hour environment like downtown New York City or San Francisco is good,” says New York adaptive reuse pioneer Jimmy Kuhn of Newmark Realty, the success of projects such as Cloud 9 Sky Flats, a suburban Minneapolis project far from the urban center, proves that offices-turned-residences don't need to be downtown to work.
“It all depends on how much you want to spend and what you can sell it for,” Ticher says. “Just like any other project.”
Silver Lining For 10 years, Gateway North, a 10-story office building in a Minneapolis suburb, was home to The Medica Insurance Co.'s 1,000 employees.
But in 2004, Medica moved out of the glass-covered structure, and the building's owner asked local real estate marketing consultants Barry Berg and John Wanniger to investigate creative ideas for the building. Given the Twin Cities' soft office market, Berg and Wanniger thought it would be unlikely that another company would rent the entire building, so the pair turned their attention to residential ideas.
It wasn't an obvious choice. Unlike most other adaptive reuse projects, Cloud 9 Sky Flats isn't part of an urban renaissance; it's located in Minnetonka, a second-ring suburb about 25 minutes from downtown Minneapolis. “We knew we were pioneering and flying in the face of a proven track record on something like this,” Berg says. But he and his partner persisted, believing Gateway North's floor plan and location would work well as multifamily residential.
Unlike the typical Class A office space, Gateway North is a longer, narrower building, rather than a structure with a square footprint, where the space in the center doesn't see any light. Instead, the former Medica offices have outstanding window spaces that allow natural light into each unit—without having to resort to an unusually deep floor plan. Additionally, the building sits at the intersection of three major freeways and on the edge of bike trails and county parks with a view of downtown Minneapolis and surrounding rolling hills. Such a location made multifamily a calculated risk for the project. “We were willing to take a chance because we felt this was the best use of the site,” Berg says.
The results are most unexpected for this corner of “the Cities.” Cloud 9 lends itself to an urban loft feel, making it an appealing choice for someone who wants the downtown aesthetic without the city center address. “It's convenient for young professionals who spend a lot of time working at nearby offices and don't want to deal with driving downtown everyday,” says Berg, adding that Cloud 9 is also attracting nearby empty-nesters trading in large suburban homes for places that are smaller and easier to maintain.
Power Up As a young man working for his father's development firm, Ted Hamilton saw the renaissance of downtown Denver in the '90s.
When he moved to Dallas in 1997 to strike out on his own, Hamilton, now principal of Hamilton Properties, a six-person boutique development firm, wanted to be part of the same movement in another city. The older elegant buildings of downtown Dallas captured his imagination. “We saw that Dallas was coming around,” Hamilton says. “There was a stock of old buildings that were available for reasonable prices, and the City of Dallas had made a commitment in 1995 to the tax-increment finance district. That was when we knew they made a commitment to revitalize downtown Dallas. Without the city's commitment, we never would have come. We knew we could buy value.”
And he did. In 1997 Hamilton Properties bought the Davis Building, a 20-story office building that had stood vacant in downtown Dallas for 15 years. The building went for around $8 a square foot, and now it's 97 percent occupied and renting for $1.28 per square foot.
These older commercial properties also tend to have some features that quickly become contemporary advantages. In the South, many office buildings feature large windows and small footprints—a great combination for residential space—because they were built before central air conditioning became common. Older commercial buildings also often have a solution for the perennial problem of parking. “Cities that exploded in the 1950s tend to have a lot of buildings that are now vacant with built-in parking solutions,” Hamilton says.
Now the developer is opening the second of what's become an ongoing series of apartment buildings emerging from office buildings that have long stood vacant. On the heels of the success of the Davis Building, Hamilton bought two Dallas office buildings, creating the apartment complex known now as Dallas Power & Light (DP&L).
It wasn't quite as challenging or time-consuming as the initial Davis project. “The City of Dallas figured out that they needed to help,” Hamilton says. “Now it's much faster going.” Residents moved into DP&L in February 2005.
Public money and support helped. Hamilton received a development grant from the city for the Dallas Power and Light property, which is also located in neighborhood designated as a public improvement district with tax-increment financing, or TIF. It works like this: For roughly 70 percent of the property in downtown Dallas, the amount that the general fund receives from property taxes is frozen at 1996 levels. As property taxes increase every year, the difference between the 1996 level and the current amount flows into the incentive fund. For example, if the property taxes were $10 in 1996 but are now $15, $10 would go to the general fund and $5 would go to the TIF fund for developers to use for projects such as public right-of-way improvements, streetscapes, environmental remediation, façade improvements, or even building a park.
Hamilton isn't the only developer involved in the residential resurgence of downtown Dallas. It takes a diverse group of developers to get to the critical mass of residents needed to create the desired 24-hour neighborhood. “We believe more is better,” Hamilton says. “”We compete, but the added vibrancies of competing buildings helps build the neighborhood.” Retailers are taking notice. A 20,000-square-foot grocery store is set to open in June 2005.
And Hamilton is continuing to expand. “We made the economics work,” he says, and in June, he expects to begin construction on his third office-to-apartment project, the Fidelity Union Building.
Banker's Hours When the Delaware Trust building burned in 1997, there wasn't much to lament. After all, the 14-story structure in Wilmington, Del., had sat vacant for years before the fire. But like a phoenix, the building found new life in the ashes.
Just three years after the fire, the Buccini/Pollin Group, a real estate acquisition, development, and management firm with offices in Wilmington, Washington, D.C., and New York City, decided to turn the Delaware Trust into a luxury apartment property with 272 units. With its original, operable windows, wooden floors, and downtown location, the building appeared to have features making it a great candidate for conversion to residential. And, the city had already begun to change. Buccini/Pollin's successful renovation in 2002 of the adjacent 85-unit Center City Building had brought in new residents, offices, and retail spaces, essentially launching Wilmington's downtown renaissance. Buccini/Pollin isn't the only company investing in downtown Wilmington: Banking giant MBNA recently completed a $32 million renovation of an old downtown courthouse for its new headquarters, which will bring hundreds of employees into the neighborhood.
Still, the challenges were many. There weren't quite enough windows, for starters. Initial design studies “showed that the Delaware Trust building had insufficient light and circulation. To make matters worse, the fire had contaminated everything,” says Bob Little of the Kling Group, an architectural and design firm with offices in Washington D.C., Raleigh, N.C., and Philadelphia. (Little and Kling colleague Richard Farley led the design efforts of the Delaware Trust metamorphosis.) So, they gutted the building down to the exterior walls and columns to create “a clean slate on the inside,” Farley says.
But “gut” doesn't mean “trash.” Throughout the process, Farley and Little worked with the Delaware Historical Authority to save the building's historic pieces such as the big bank's lobby room and the three original courtyard facades. Today, the bank's lobby room serves as a great-room for residents and their guests, who can get continental breakfast there in the morning and play billiards there at night.
The process was fast but complex. The Delaware Trust building had been constructed in phases throughout the 1920s in a massive U-shape. But in 1959, the property gained another structure: a 22-story tower that was constructed in the middle of the U. The exterior walls of the original building on the inside of the U, where the new tower was going up, were torn down. The new tower was an addition to the existing building. From the inside, it was hard to tell where one started and the other left off. Both structures had to be addressed in the renovation, which involved demolishing parts of the building while simultaneously rebuilding other parts of the structure. “We dissembled the tower in the middle and built up the historically significant building at the same time,” Little says. “At one point the demolition and buildup crossed paths about halfway through the project.”
As the middle tower came down, it became apparent that the three original decorative courtyard facades had to be redone. So did portions of the historical building's exterior walls, which were lost when the 1959 tower was removed. And, of course, these walls had to be rebuilt to match the rest of the historic structure, made of bricks from the 1920s. “We did our best to search out a suitable similar brick,” Farley says. “The original brick company had long been out of business.”
Interiors offered their own trials. “I wrestled with the floor plans,” Farley recalls. “We had to pay close attention to how deep a unit could be, because there were only so many windows. The challenge was to put a window in each bedroom and living space.” The floor plans were designed to make the most of whatever light was available. In each floor plan, light from the windows in the living room and bedroom flows into the kitchen and bath.
But the efforts paid off. Today the Residences at Rodney Square are more than 80 percent occupied, well ahead of projections. Plans are underway to develop Christina's Landing, a waterfront area, bringing even more businesses and people to downtown.
It's never easy to breathe new life into an existing office building, no matter how old it is. The project almost always comes with problems that don't exist in new construction. But it can be worth the effort to save the character of the building and turn it into a unique place to live that residents will enjoy for years to come.
– Julie Swenson is a freelance writer in Minneapolis.
Cloud 9 Sky Flats Minnetonka, Minn.
- Past Life: Insurance office building
- Units: 164, selling for base prices of $145,000 to $450,000
- Sales: More than 100 sold
- Features: WiFi environment through out; each unit comes with a flat screen TV and wireless phone system; Scandinavian-inspired cabinetry with brushed steel details
- Notable: Some buyers have merged units to create individual units valued between $700,000 and $1 million
- On the Web:www.cloud9skyflats.com
Dallas Power & Light Dallas, Texas
- Past Life: Includes two historic structures, which are the 18-story building completed in 1931 for Dallas Power and Light and an 8-story structure built in 1935 for Continental Supply Co.
- Units: 158, with ground floor retail
- Stats: Each apartment is 1,000 square feet and rents for roughly $1,400 monthly.
- Competition: Surrounded by 1,200 apartments within three blocks, with another 750 units under construction
- On the Web:www.dallaspowerand light.com
The Residences at Rodney Square Wilmington, Del.
- Past Life: Home to the Delaware Trust Building, built in the 1920s
- Units: 272 luxury apartments and 272 parking spaces
- Mix: Studios, one- and two- bedroom units, and penthouses, which rent for $825 to $3,500
- Money: Renovation cost partially financed with $15 million of historic tax credits
- On the Web:www.theresidences.net
Condo Concerns Any adaptive reuse project comes with challenges. But if you're thinking of converting an office building into condos, you need to be extra careful. Here are the top issues to watch on your project:
Construction Liability: In adaptive reuse, these older structures aren't always completely rebuilt. This can leave current office-to-condo developers potentially vulnerable to construction defect lawsuits for work done decades before by the original (or subsequent) builders. “Every developer is faced with some risk,” says Paul Ticher, a partner with Cox, Castle & Nicholson law firm in Los Angeles. “But the courts haven't addressed this issue yet—it's a new trend.” Fully gutting a building down to steel framing eliminates some of that risk because so much of the work is new.
Mixed-Use Issues: These types of projects often combine residential, retail, and office space, so developers and architects must remember that from the start. “Maximize flexibility as far as who the potential tenants will be,” Ticher says. “Think ahead about duct work, access to the roof, and ventilation so any business can rent there.” For residential, that means designing the project to minimize any noise or aromas from the commercial sections. If a restaurant might use the space one day, make room for an exhaust system that can handle odors and smoke. Situate the parking so that residents hear the least possible noise. Finally, do disclose any potential impact the commercial space could have on the residential areas.
Board Balance: Ideally, the condo association structure should be appropriately balanced between commercial tenants and condo owners. If the project includes a great deal of commercial elements, the board could establish a condo committee responsible for the residential areas and a commercial committee accountable for the office and retail space. Just make sure the association bylaws don't give the two groups “the ability to battle too much,” Ticher advises.
Line Items: Make sure the association is financially prepared for the unexpected costs that happen with any adaptive reuse project. In a new development, for example, the roof may last 20 years—but in an office-to-condo renovation, that roof may only have 10 years left. If the association has adequate reserves, though, its bank account should be able handle such events.