Some Texas Developers are Converting Workspaces into Apartments

By Joshua Fechter, The Texas Tribune

DALLAS — From an 18th-floor apartment smack dab in the middle of downtown, a renter sipping coffee at a quartz countertop would have a view of towering office buildings and a distant horizon. If they moseyed to their bedroom window at the corner of Santander Tower, they could look down on bustling rush-hour traffic — and a giant sculpture of a eyeball.

Until earlier this year, no one could have called the two-bedroom apartment home. Before then, it was a vacant, unused workspace.

“This was someone’s corner office,” said Katy Slade, a Dallas developer behind the recent renovation of the high-rise on Elm Street.

In the wake of the COVID-19 pandemic and the rise of remote work, the U.S. is sitting on a ton of vacant office space — and Texas is no exception. The state’s largest metropolitan areas are facing double-digit office vacancy rates even as their workers are back in the office at higher rates than employees in other major cities across the country.

At the same time, the U.S. is facing an acute and persistent housing shortage. By various estimates, the country needs millions more homes than it has — a key driver of the nation’s housing affordability crisis. Texas has one of the worst housing shortages in the country, second only to California, with a need for 306,000 more homes than it has, according to a recent analysis by Up For Growth, a nonprofit that focuses on housing policy.

Housing advocates, office landlords, policymakers and developers see the glut of empty office space as a potential vehicle to help solve the nation’s housing woes by converting the unused space into new apartments — while also keeping those properties financially viable.

[Despite strong economy, Texas cities grapple with excess office space]

It’s a complicated idea that nonetheless has gotten the backing of the Biden administration — which in October launched an initiative to encourage cities and states to find ways to convert vacant office buildings into affordable housing, in part with federal financing.

Some of that work is already underway. The state General Land Office in August announced it wants a developer to convert a three-building office complex owned by the state in downtown Austin into housing for households making between 60% and 100% of the area median income.

The idea seems particularly suitable for the state’s downtowns, where office vacancies are most visible. For instance, nearly 20% of the office space in Austin’s central business district is sitting vacant, according to recent figures from CBRE Group, a commercial real estate services and investment firm. Before the pandemic, that figure was 6%.

With Austin facing a severe housing crunch, those high office vacancies in the city’s urban core present an opportunity to add more housing downtown, Austin City Council member Zohaib "Zo" Qadri said.

Downtown Austin on Sept. 21, 2023. Credit: Tico Mendoza for The Texas Tribune

The Houston skyline on Dec. 17, 2018. Credit: Miguel Gutierrez Jr./The Texas Tribune

First: Downtown Austin on Sept. 21, 2023. Last: The Houston skyline on Dec. 17, 2018. The rise of remote work after the pandemic has left cties across Texas and the nation with a glut of office space in the midst of a widespread housing shortage. Credit: Tico Mendoza for The Texas Tribune | Miguel Gutierrez/The Texas Tribune

“What downtown Austin, and what Austin as a whole, needs is more housing,” said Qadri, who represents downtown Austin. “We have a lot of these empty office buildings and parking garages. I think looking at how we can renovate them into housing units is something that there's more of a need (for).”

Converting offices to residences, real estate experts warn, is often easier said than done. Not every office building is a good fit to become a residential building owing to factors like buildings’ floor plans, plumbing and zoning, said Harold Hunt, a research economist who studies commercial real estate at the Texas Real Estate Research Center at Texas A&M University.

Smaller buildings built before the 1980s tend to be better candidates for conversion, Hunt said, but larger ones built after that don’t always lend themselves easily to conversion.

“The problem (developers) have with the '80s buildings is you've just got a big building,” Hunt said. “It's pretty on the outside, but does it really work for residential?”

Though homebuilding activity rose last month amid the nation’s housing crunch, it’s possible that high borrowing costs — the result of high interest rates imposed by the Federal Reserve — will eventually tamp down new renovations.

“You’ve got interest rates, they’re high and maybe they haven’t finished rising,” said Phil Mobley, national director of office analytics at CoStar, a company that tracks commercial real estate. “You’ve got high construction costs. So it's not easy to sort of unwind excess supply that has been allowed to develop over the years.”

Still, Dallas City Council member Jesse Moreno, who chairs a committee on housing and homelessness solutions, said the city is exploring ways to encourage developers to include units for lower-income tenants when they convert unused office space into residences. Downtown Dallas has more residential conversions underway or in the works than in any other part of the state, but often those apartments are out-of-reach for poorer families.

“We have to have mixed-income housing,” Moreno said. “It can't just be all penthouses and luxury apartments. We have to ensure that individuals who are working in our bars, who are working in our restaurants, our nurses, police officers, all have a place to be able to afford.”

Diners stand outside of City Tavern on Elm Street in downtown Dallas on Nov. 07, 2023. The Santander Tower, one of Dallas' tallest buildings, is visible in the background. Credit: Ben Torres for The Texas Tribune

Already, office-to-residential conversions have created nearly 20,000 housing units nationwide since 2016, according to a recent analysis from CBRE — and there’s another 21,000 units in the hopper. But experts in real estate, housing and urban policy caution that converting empty offices into apartments or condominiums isn’t the silver bullet for solving the nation’s office vacancy woes or its housing affordability troubles.

Though there’s plenty of office-to-residential conversion activity going on in the country, it accounts for a small slice of the nation’s overall office space, said Julie Whelan, who studies trends in commercial real estate for CBRE.

“Nationally speaking, we have to remember that, yes, there's an uptick in conversions underway, but it's still only about 1.6% of inventory overall nationally,” Whelan said. “So we're not talking about crazy numbers.”

That’s in part because not every vacant office building makes sense to be converted into apartments, real estate experts say — which means office landlords can’t just expect to save their lagging space through a residential conversion.

“You're going to have to think much more creatively about how to get people back to the space,” said Steven Pedigo, director of the University of Texas at Austin’s LBJ Urban Lab, which focuses on urban policy.

Texas has 13 office-to-residential projects underway or in the planning stages not including mixed-use projects, per CBRE. And there’s potentially room for more: an analysis by researchers at New York University, Columbia University and the National Bureau of Economic Research pinpointed some 149 office properties in the state’s four largest urban areas that would be good candidates for office-to-residential conversions.

Nowhere in the state are more offices being converted to residences than in downtown Dallas. A glut of scarcely used office space built in the ‘80s has long kept office vacancies high in the city’s central business district, to which developers over the years have often responded by renovating empty offices into homes or hotel rooms. The rise and persistence of remote work drove those vacancies even higher. The office vacancy rate for Dallas’ central business district is nearly 31%, recent figures from CBRE show.

The downtown’s high vacancy rate helped push Pacific Elm Properties, which owns the Santander, to move forward with converting a significant chunk of its office assets, said Sara Terry, Pacific Elm chief marketing officer and executive vice president. The firm intends to convert nearly a quarter of the 6.5 million square feet of office space it owns in Dallas' urban core into residences, she said — a move that will produce close to 1,100 units.

Sara Terry, left, with Pacific Elm Properties, and Katy Slade, founder of Mintwood RealEstate, conduct a tour of residential spaces at the Santander Tower in downtown Dallas on Nov. 07, 2023. Credit: Ben Torres for The Texas Tribune

“It's going to support the long-term viability of our downtown market because it's going to bring more people that are living downtown that are going to choose or want to be able to walk to their office,” Terry said.

Downtown Dallas is a hotbed of office-to-residential conversions — where projects in the works or underway are expected to produce nearly 2,000 apartments, according to Downtown Dallas, Inc.

Among those is the 50-story Santander Tower, built in 1982 and one of the tallest buildings in the city.

The tower has office tenants, including the financial services agency the building takes its name from as well as a law firm and an investment company. But pockets of vacancies had built up in the building, Terry said, owing to tenants large and small moving out over time.

A view of the Margaret Hunt Hill Bridge from The Tower Club on the 48th floor of the Santander Tower in downtown Dallas. Credit: Ben Torres for The Texas Tribune

The view from the lobby of the Santander Tower. Credit: for The Texas Tribune

A one-bedroom apartment inside the Santander Tower in downtown Dallas. Credit: for The Texas Tribune

First: The view from the lobby of the Santander Tower. Last: A one-bedroom apartment inside the Santander Tower. Credit: Ben Torres for The Texas Tribune

Pacific Elm last year teamed up with Mintwood Real Estate to give 14 floors’ worth of empty office space a significant makeover, turning that unused space into about 300 swanky one- to two-bedroom apartments replete with quartz countertops and decadent downtown views that fetch rents anywhere from $2,200 to $4,700.

The building is replete with comforts aimed at attracting tenants who crave an urban experience, Slade of Mintwood said. On the ground floor, there’s a café and a lunch spot that switches to an aperitivo menu in the afternoon. Forty-eight floors up is a members-only dining club. Residents who work from home can rent additional office space elsewhere in the building if they need it, Slade said. Eventually, the building will have a pool and on-site dog park.

“A lot of our residents right now are moving from coastal markets and urban markets, and they value the high-rise urban experience,” Slade said. “They want to be downtown where it is truly urban.”

This article originally appeared in The Texas Tribune at https://www.texastribune.org/2023/12/06/texas-office-space-housing-conversion/.