"The market has spoken, and it said there is more value in a conversion than in continuing as office space," explained Michael Abrams, principal of Foulger-Pratt, the real estate development firm that is transforming the 14-story New York Avenue building into 255 apartments.
AFP Washington
WASHINGTON, UNITED STATES - Just a few blocks from the White House, a modest building in downtown Washington that once housed offices of the United States Department of Justice will become home to hundreds of people.
The transformation of that empty space into offices is part of a wave of "adaptive reuse" projects that swept through the U.S. real estate market in 2021, when developers bought struggling hotels and offices and then announced they would be converted into apartment buildings.
"The market has spoken, and it said there is more value in a conversion than in continuing as office space," explained Michael Abrams, principal of Foulger-Pratt, the real estate development firm that is transforming the 14-story New York Avenue building into 255 apartments.
A survey by the real estate search service RentCafe found that last year about 20,100 apartments in the United States were built from converted properties, almost double the number from the previous year.
So-called real estate conversions could offer a path forward for downtown locations in American cities, which have not been the same since the exodus of office workers due to the outbreak of Covid-19 almost two years ago, leaving local landlords and businesses struggling.
"The slow recovery of the office market will only make it much more expensive to maintain empty office buildings," Abrams predicted.
Conversions can also alleviate the shortage of affordable housing, particularly in cities like Washington, where notoriously high rents are a feature of the lifestyle.
"From a general perspective, we just need more supply. With more supply, both housing price growth and rents will decrease," said Lawrence Yun, chief economist at the National Association of Realtors (NAR).
Too many offices
Despite the recession caused by Covid-19, the average price of existing homes rose 15.8% over the course of 2021, and by last month, supply had reached a record low, according to NAR data, likely exacerbating a pre-pandemic affordable housing crisis.
As of 2017, the U.S. Government Accountability Office (GAO) considered that 48% of renters had "a rental burden," meaning they paid more than 30% of their income on rent, a figure that had increased six percentage points over the previous 16 years.
Meanwhile, the country has a surplus of office space. And, because many of those buildings date back to the 1980s, they are now too outdated to be attractive to businesses, explained Tracy Hadden Loh of Brookings Metro.
With its designs focused on outdated needs like filing cabinet space, "the whole building is really outdated," he said in an interview.
"Greater and better use"
Marc Ehrlich, chief investment officer of Rose Associates, which has converted New York offices into housing, said such projects tend to be "well-located properties that need greater and better use.".
One of his firm's recent promising projects is the transformation of an office once used by the telecommunications company AT&T into a place where people want to live.
The new apartments will feature collaborative workspaces, given the likelihood that many tenants will want to continue working from home, Ehrlich predicted.
In Washington, real estate developers are snapping up properties that were previously rented by the region's top employer, the federal government.
One of them is The Wray, an office building formerly used by the State Department, now completely renovated to house apartments. The only traces of its former use are in the lobby, where the mosaics are original and the office directory has also been preserved.
"The pool of (former) tenants returning to (use) these buildings is shrinking dramatically, and that's what puts pressure on that type of property, that's what creates the opportunity," Abrams said.
Adaptive reuse projects tend to demand high rents, Loh said, because they often require costly renovations, such as building new individual bathrooms where they were once communal.
While expanding inventory has been shown to ease prices in other areas of the housing market, "this is not a solution to the housing crisis," he cautioned.
"This is a solution to revitalize areas like city centers that are super-dominated by places like office spaces.".
