Office Conversions Kill 2 Birds With One Stone In Dallas’ CBD And Beyond

October 26, 2022

Conversions to multifamily are beginning to put a dent in office inventory in Dallas’ central business district, with more than 2M SF of vacant space coming off the market in the coming months.

Projects underway include the planned conversions of Bryan TowerRenaissance Tower, Energy Plaza, Santander Tower and 501 Elm Place. Taken together, the projects will knock 6.5% off the CBD’s office vacancy rate, which sits at 31.6%, according to JLL.

Adaptive reuse projects that convert office space to residential are nothing new, but experts say a confluence of timely factors is behind the surge Dallas’ CBD is experiencing today.

An intentional effort by city officials and stakeholders to create a more walkable, livable downtown has led to an influx of residential development aimed, in part, at supporting retailers that have for years missed out on valuable foot traffic.

At the same time, corporate rightsizing and a widespread shift to hybrid work have diminished the need for certain types of office product, creating a fortuitous opportunity to solve two problems at once.

“When you look at the spaces that have been vacant the longest, it's spaces that are older and a little more obsolete,” JLL Managing Director Torrey Littlejohn said. “The ability to convert those to multifamily, I think, is a win-win.”

Dallas isn't the only city where a changing office market and tight housing supply have created strong demand for conversions. In New York’s Financial District, Silverstein Properties and Metro Loft are turning 55 Broad St., a largely vacant office building, into more than 500 apartments.

Some half-dozen office-to-residential developments have started in Washington, D.C., in the last two years, while officials in Chicago recently released a plan to provide incentives for developers revitalizing the city’s iconic LaSalle Street, which is dealing with 5M SF of vacant commercial space.

Nationwide, adaptive reuse projects have delivered about 32,000 new apartments since the start of 2020, 41% of which are in former office buildings, according to RentCafe. In 2021, roughly 7,400 apartments were created via office conversions.

Despite their growing popularity, some submarkets are better suited for conversions than others.

The Dallas CBD has a large concentration of towers built in the 1970s and ’80s, a time office development was surging and new builds often exceeded 1M SF.

The size and age of those buildings have rendered them largely unable to compete with newer properties, especially as companies prioritize quality above all else.

“When we look at absorption over the past few years, almost all of it has been in buildings that were built after 2015,” Littlejohn said. “There’s not a lot of buildings downtown built after 2015.”

Across Dallas’ CBD, there are more than 27M SF of rentable offices, 4.7M SF of which are categorized as Class-B. More than 26% of Class-B product was vacant in the third quarter, according to CBRE.

The area also has 213K SF of Class-C inventory, which Merriman Anderson Architects principal and team leader Jennifer Picquet-Reyes said is particularly well-suited for conversions. Low ceiling heights and other architectural features common in older buildings tend to be easier to remedy when converting to residential, she said.

“There has historically been a lot of Class-C office space [in the CBD] that doesn’t really convert well to Class-A, but it can convert very well to residential or hotels,” Picquet-Reyes said.

Woods Capital is in the midst of converting two office buildings downtown. The first, Santander Tower, is a 50-story, 1.4M SF skyscraper from the 1970s, and the second, Bryan Tower, is a 40-story, 1.1M SF structure from the 1980s.

Taken together, the projects will add close to 600 residential units to the CBD.

Billy Prewitt, executive vice president and chief investment officer at Woods Capital, said the towers have large contiguous blocks of vacancies that make them good candidates for conversions.

At the same time, the towers are so large that it doesn’t make sense to turn the entire structure into apartments, thus prompting the need for various uses. Some office space will be preserved, as well as hotel and retail space.

“If we took Bryan Tower and converted the whole thing, that would give us about 800 units,” Prewitt said. “Conventional wisdom in the multifamily world is that with 800 units, you’ll never reach full occupancy.”

Energy Plaza is another 1980s office building where commercial real estate firm Todd Interests is converting large swaths of vacant space into apartments.

The desire to bring more residents downtown is a driving force for the project, but Managing Director Patrick Todd said his team’s unwavering confidence in the CBD office market is just as big a factor.

“We are doing half a million square feet of office speculatively, and that speaks to our belief of what the demand is for office,” he said. “We really believe in both.”

Woods Capital also has faith in the continued success of the office market, but Prewitt said the velocity of absorption has slowed as leases roll and tenants rightsize. The amount of office space in Santander and Bryan towers is being adjusted and upgraded to reflect that shift, he said.

“We don’t see high-quality office buildings necessarily going backwards in terms of their occupancy. We see them going forward, but slower,” he said. “For us, this was an opportunity to keep things moving forward faster.”

Relatively fast delivery and a reduced level of risk are also behind the growing popularity of conversions, Todd and Prewitt said.

Banks feel more comfortable underwriting multifamily projects than office. At the same time, developers can often sidestep many of the headaches that come with ground-up development, such as entitlement hurdles and issues around the cost and lead times for building materials.

“You’re taking something that doesn’t have that risk and allows for a much faster construction timeline,” Todd said. “That’s something we found lenders are generally willing to take on.”

Not every office building can be turned into apartments, but where it makes sense, conversions allow developers to give a defunct building new life.

In the case of Dallas’ CBD, converting office towers pays tribute to the history of downtown while also ushering in a new era of vitality, Merriman Anderson Architects President Milton Anderson said.

“We’re not tearing down a lot of beautiful old buildings,” he said. “They have great bones, and they have wonderful histories. So reusing them just spurs that next level of growth.”