Vacant Office Buildings are Turning into Apartments
As owners of older office buildings struggle with low occupancy rates, interest in converting them to apartments is growing.
Office rentals in Atlanta, particularly in older buildings that might not have class A amenities, are finding tough going in a market where big companies are shedding office space, and a surge in new construction has added more than 18 million square feet of prime office properties in the last half-dozen years.
According to Co-Star, a real estate data firm, there is a record 9.1 million square feet of office space on the market, as companies like ATT, NCR and McKinsey, the consulting firm, have found they need much less space when they have more workers putting in time on their computers from home.
In the last four years, the office vacancy rate in Atlanta has jumped from 11.5 percent in 2019 to 14.7 percent today — not much below the all-time Atlanta high for vacancies of 16 percent that was seen during the financial crisis 15 years ago.
Adding to the pressure on building owners are high interest rates and the reluctance of financial lenders to take on new clients.
One real estate veteran, Kenny Wolfe, who has been in commercial real estate for the past 14 years, believes that office owners who are in trouble have few good financial choices.
“If you’re in that camp as an office owner, there’s really not a lot of good options for you right now. The highest leverage level you’re going to get on an older office building right now is 50 percent of the new lower value that many buildings are being appraised at. Many of those values are underwater from a financial standpoint right now.”
The lagging market here and in many American cites has been a source of opportunity for Wolfe’s firm, which, for the last three years, has been buying up older office buildings in what were formerly thriving commercial centers and turning them into apartments.
Right now, his firm has a dozen older office buildings in cities around the country that are being renovated into living spaces. Two of the buildings are in Atlanta. He’s rebuilding the old W.T. Grant building, which was originally constructed at 33 Broad Street in 1898 in the Central Business District, and 41 Marietta Street, just a few blocks away. The Grant building, which was once one of the largest structures in the Southeast when it was first built, will have shops on the ground floor and commercial space on the floor above, but the rest is already rented. A firm that rents short-term rentals on Airbnb has taken most of the rest of the building. The Marietta Street building will be apartments.
It’s not always an easy job doing these conversions. Office buildings are laid out differently than apartments. There might be support columns that run through the building at 20-foot intervals, windows that need replacing so they can be opened and closed and rewiring and new plumbing. It can be expensive, but the attractiveness of city living for many, particularly singles and young couples, according to Wolfe, is worth paying a premium for living in a unique structure in the heart of the city.
“The cost of renovation varies widely…because the building may have been rebuilt recently. So, it’s a kind of a deep dive, that could be as cheap as maybe $180 a square-foot, all the way to $450 a square-foot to do the building.”
Increasingly though, city governments are willing to provide help, particularly in cities like Atlanta, where there’s a shortage of housing in general and particularly those that are affordable.
It’s not always an easy job doing these conversions. Office buildings are laid out differently than apartments. There might be support columns that run through the building at 20-foot intervals, windows that need replacing so they can be opened and closed and rewiring and new plumbing. It can be expensive, but the attractiveness of city living for many, particularly singles and young couples, according to Wolfe, is worth paying a premium for living in a unique structure in the heart of the city.
Late last year government officials and business leaders from some of the largest cities in the country met under the auspices of the Brookings Institute to explore ways of revitalizing the commercial centers. Philadelphia has a long-standing tax abatement program to encourage conversions. There have been 180 building conversions therein — a 55 percent increase in people living downtown.
Eric Kronberg, an Atlanta architect with an interest in urban revitalization, believes that Atlanta may be looking more closely at what can be done to encourage the conversion of office buildings that, in some cases, are nearly empty.
“Usually, the city wants workforce housing and so it becomes just a balancing act using carrots and sticks. And when this is a case of bring people back to the city center, it’s mostly carrots. Like, hey, what kind of carrots? They can offer some good things.”
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