A growing trend is taking shape in the Washington D.C. housing market: repurposing obsolete office buildings into condos.
A 2015 report by CoStar Portfolio Strategy market analysts showed office-to- condo conversion activity is adding up to 11,500 multifamily units to a large downtown market, including Washington D.C.
The growing office-to- condo trend in Washington D.C. stems from a limited demand now for office space. Helping to drive the trend are millennials and baby boomers who seek to leave the suburbs and want to live in a vibrant, walkable urban environment with Metro access. In addition, real estate observers believe that renters and buyers are seeing converted condos as a more affordable alternative to new high-price multifamily properties.
As a result, developers in D.C., as in cities like New York, are repositioning their empty Class B and C office space to take advantage of the growing demand for urban residential space.
According to CoStar, condos transformed from an underperforming office building can attract investment sales prices of up to $5,000 per square foot, higher than what the office space attracted. And the high cost of constructing a multifamily property make a condo conversion a more profitable option.
The first District office-to-residential conversion was in 2004 in Penn Quarter when Washington D.C. developer PN Hoffman converted a 10-story 1917 office building into a luxury condo with 50 lofts and 12 studios. Other repurposed buildings followed suit, including Dumbarton Place in Dupont Circle, a six-story boutique condo that was converted from a 1970s office building in 2005.
Today, D.C.-area developers see more opportunity. In November, 2015, Chevy-Chase- based Tasea Investment Company announced its design by Arlington-based MTFA Architecture to convert an obsolete, 30-year- old office building on 22nd Street NW in Dupont Circle into a multifamily residential. The new residence will offer 77 units and replace an adjacent surface parking lot with a nine-story, 120-unit residential addition. Several retail spaces will be added. The current building’s only tenant, the United States Post Office tenant, will remain after the rebuild. The project is expected to be completed in 2017.
This fall a high-end condo converted from 1980s office building will open in the West End on M Street NW. The structure was the former headquarters of the Association of American Medical Colleges and formerly featured six lower floors of Class B office space with three upper floors of condos. Washington D.C.-based PRP Real Estate Investment Management worked with D.C. design firm CORE on the current makeover, which calls for 59 high-end condos overlooking Rock Creek Park. Nabu, a world-famous Japanese restaurant, will occupy the ground space. The building is located near the Foggy Bottom Metro.
There also has been office-to-condo activity just outside D.C.
In Alexandria, Bethesda-based developer EYA converted the 30-year- old Sheet Metal Workers Union National Pension Fund building, outside of Old Town along the Potomac River, into luxury condominiums. The original structure, vacated in 2011, featured a slopped rooftop of solar-paneled terraces but was considered an eyesore and only had small office spaces. The redesigned building, now called the Oronoco Waterfront Residences, houses 60 units that nearly sold out within a few months of its opening in August 2014. The site is in walking distance of the waterfront and King Street’s shop, restaurants, attractions, and Metro.
Last year Arlington County approved redevelopment of the “Paper Clip” building on Army Navy Drive in Crystal City. The 1967 office building once housed the Department of Defense Inspector General’s Office. The redevelopment by Bethesda’s LCOR calls for two 20-story glass towers with 453 multiple-family units, including 15 affordable housing units. The project is in proximity to two Blue Line Metro stations.
Maryland also is experiencing office-to- condo reuse. Octave 1320, an office-to- condo conversion in Silver Spring, was completed last fall. Rockville-based ProMark Development worked with District architecture firm BKV Group to design 102 condo units geared for first-time buyers. The office space was vacated in 2014 and retrofitted in one year. The site is near Metro and walkable to shops and nightlife.
Converting an aging office into a condo is challenging. Developers, property managers, and investors should weigh the risks against the rewards. There will be economic, design, and zoning factors to consider, but location in an urban neighborhood is still the key. The property location should be assessed to see if there is viable growth potential in the nearby area and whether the site is in walking distance to restaurants, shops, attractions, entertainment, and transit.
In a conversion, existing offices will need to be gutted, spaces reconfigured, asbestos removed, and mechanical, plumbing, electrical systems reworked. Renovations will need to include home design features, amenities, and aesthetics condo owners prefer—such as open floor plans, pools, rooftop terraces, and courtyards—with the features they need—such as parking and security. Tax incentives for including affordable housing units should also be weighed.
Developers, property managers, and investors should also consider the size and scope of a redevelopment project and what fits their needs. The current conversion of the former offices of Planned Parenthood on 16th Street NW in the District into a combination of offices and 15 condos is a good example of a smaller office-to- residential conversion on the market.
Despite the cost and challenges of retrofitting office properties, the trend of converting outdated Class B and C office spaces is gaining momentum, as more investors shop for these properties.
Looking ahead to the rest of 2016 and beyond, D.C.-area developers, property managers, and investors should keep their fingers on the pulse of this trend inside—and just outside—the District.