Second Lease

By Philip Shea, Associate Editor 

At the 2012 MHN Editorial Advisory Board Meeting, the team had the opportunity to tour the innovative and transformed 95 Wall Street—a high-end apartment community in the heart of New York’s Financial District that used to be the home of financial services giant J.P. Morgan. Now owned and operated by UDR Inc., the building was converted to luxurious residential spaces by the Moinian Group in 2011, and our editorial board members were impressed by how well the asset was repositioned for a hip Manhattan apartment market.

For the multifamily industry, the practice of adapting former office buildings into contemporary apartment communities has taken off in recent years, and developers are finding there are a number of practical benefits in opting for such a project over new ground-up construction.

Mark Humphreys, CEO of Humphreys and Partners Architects, aptly calls this trend the “Manhattan-ization” of the United States, and notes the advantages he’s seen in trying to appeal to developers with office-to-apartment conversions in urban core submarkets.

“What’s great about buying an office building in downtown San Francisco—you don’t have to go through all the stuff to get a building envelope approved; it’s already approved,” says Humphreys. “So in many cases, if the use—being apartments or office—is already OK’d in that area, then you don’t need a lot of approvals to re-do or gut the inside of a building.”

Humphreys adds that having elements such as parking structures and windows already included considerably expedites the process, and that this can be true for hotel and warehouse conversions too. Humphreys & Partners’ Metropole office conversion project in Houston came equipped with a parking garage.

Of course, the importance of getting zoning and regulation issues in order for such undertakings cannot be overstated. As Bob Koch, chairman at Fugleberg Koch Architects, notes, the project “has to be consistent to allow an adaptive reuse to a use that would normally be categorized in another section of the same zoning code.”

“Before you even look at the building, no matter how superbly constructed the building would be for adaptation, if all the land parameters are not in place, you don’t have a chance,” says Koch. “So that’s the priority from my perspective.”

Once these parameters have been met, however, there are additional challenges unique to office building conversions of which developers should be acutely aware. For one, much of the internal mechanical and electrical equipment needs to be upgraded or replaced entirely. Humphreys states that, because of this, a lot of people overestimate how much they’ll be saving in a conversion over a new build-up.

“It’s a lot of work because you cannot use any of the wiring,” says Humphreys. “You have to pull all of the old wiring out of the building because they don’t want loose wires hanging around and some electrician coming later hooking up to an old set of wires and you don’t know where it’s going. Everything’s got to come out.”

Koch echoes this point and emphasizes that there are a whole host of differences between commercial and residential layouts, and that the obstacles presented in a conversion are not just superficial—they go down to the basics of structure and overall design.

“The general design parameters for residential and those of commercial uses are substantially different, not only infrastructurally, because you wouldn’t nearly have as much plumbing for instance in an office building as you would in an apartment building with the same general area,” says Koch.

He adds: “You would normally have more parking area for an office building and retail than you would for an apartment building.”

Koch also emphasizes that the density in multifamily is driven by the “availability of exterior wall for windows” since bedrooms must have windows, and that this often leads to awkward layouts and limited floor plans.

“I’ve actually had more success converting hotels to apartments than office buildings to apartments, and the reason is a hotel has all the same design parameters as an apartment,” says Koch. “The very infrastructure you’re trying to flex in that office building is not the infrastructure you’re going to use in an apartment.”

However, this should certainly not deter developers from doing such a conversion if the right factors and ingredients are in place, and Koch goes on to describe what these are and why office conversions do present marked advantages in the right circumstances.

“The first motivation is the building is located where the demand is,” says Koch. “The second is you’re buying a building that’s built generally with a longer lifeline than a multifamily building. If the majority of multifamily buildings are wood up to five stories, seldom do you see an office building or a commercial mixed-use building that’s not steel or concrete or some hardened form of construction.”

Aside from the architectural and engineering aspects, Humphreys believes that taking advantage of existing structures in key locations is an irresistible investment opportunity that ultimately just boils down to good business practices and common sense.

“This living in the central business district has just taken off in the last five years,” says Humphreys. “We all may be too close to the forest to see the trees if you will, but there are buildings that are sitting there that you’re looking at, and you’re not going, ‘Whoa. Why am I looking for sites? I’ve got a site and a building right here.’”

Additionally, many cities and municipalities are encouraging these types of projects in order to revitalize certain submarkets and urban cores. For instance, the aforementioned 95 Wall Street development received a tax abatement from the City of New York until 2023 under the city’s 421-g Program, as well as an exemption from real estate taxes until 2021, according to a press statement by the Moinian Group.

Yet all things considered, it takes a strong vision for even the most well located project to be successful. In other words, certain principles of design and operation that apply to other types of communities equally apply to conversions—perhaps even more so. After all, the building was not originally designed with residents in mind, so vision—whether of architects or developers—cannot be discounted.

“My general experience is success follows smart and successful people,” says Koch. “So at the end of the day, what you’re really asking is: how studious was the deliberation on the front end of the deal in making the judgments?”

And in terms of which principles and judgments are foremost in such an undertaking, Koch reemphasizes space and accessibility as key.

“Don’t just think area—think flow. Think furnishability. Think all the things that you as a consumer would [prioritize],” says Koch. “I look at a lot of these conversions and scratch my head and say, ‘But for a little bit more thoughtfulness, there could have been something much nicer.’”