Dozens of aging office buildings across Seattle, Tacoma and Bellevue could be good candidates for conversion into thousands of new apartments, a possible bright spot as the region’s housing crisis persists and empty offices abound.
But making the financial math work on those conversions could be a challenge.
Given office building values, apartment rents and other factors, the average Seattle-area office building that is physically feasible for conversion would be unlikely to attract a private developer without government incentives, researchers from New York University and Columbia University found in a working paper published last month by the National Bureau of Economic Research.
Converting older, inefficient offices into energy-saving apartments could revitalize sleepy downtowns, maintain city tax revenues and reduce carbon emissions, the researchers argue. Cities across the country face “a fundamental misallocation of space: too much office, too little housing,” they wrote.
Across the downtown areas of the nation’s 105 largest cities, the authors estimate that 15% of office buildings are physically suitable for conversion. That drops to about 11% after removing buildings that still house many long-term tenants or those that are “relatively clean” environmentally.
Ninety-one buildings in the Puget Sound region could be candidates for conversion, ranging from Seattle’s historic Smith Tower to dated three- and four-story office buildings in Federal Way, Kirkland and other suburbs, according to a list compiled by the researchers and first reported by the Puget Sound Business Journal.
That may be an undercount. Given some data missing from the analysis, the Seattle region could in fact be home to as many as 270 buildings ripe for conversion, said Stijn Van Nieuwerburgh, a professor of real estate at Columbia University and one of the authors of the paper. If all those were converted, they could result in about 14,600 new apartments.
Cities across the country are looking for ways to encourage office-to-residential conversions as remote work continues, office space sits empty and communities large and small deal with housing shortages.
Earlier this year, Seattle held a competition for building owners and architects to submit ideas for converting office buildings to residential uses. Several conversion projects are reportedly planned for downtown Tacoma and marketing materials for Seattle’s Smith Tower, currently for sale, float the prospect of converting office space there to housing.
The idea is enticing as office space sits empty and office building owners watch their assets drop in value — particularly those who own older properties with fewer amenities.
About 19% of office space across the region is vacant or available for sublease, with even higher rates of empty space among older buildings and buildings in downtown Seattle and South King County, according to a recent analysis from the commercial real estate firm JLL.
“While employers have grown more firm in their call to bring employees back to the office, overall office demand has lagged,” JLL analysts wrote. “Leasing activity was largely concentrated in [downtown Seattle and Bellevue] as tenants continued to favor high-quality, well-located space.”
Yet conversions are rare. The number of office-to-residential conversions across the U.S. has not increased significantly compared to pre-pandemic, according to the commercial real estate firm CBRE. Generally speaking, that’s because conversions can be expensive while failing to generate enough additional profit to make the costs worth it, CBRE economists wrote.
Not all office buildings are a good fit for apartments or condos — and attracting developers to those projects could require controversial government incentives.
Many huge modern office buildings have too much space far from windows, windows that don’t open, or plumbing that needs upgrades to support multiple homes. For their analysis, the NYU and Columbia researchers looked for buildings built before 1990 that were physically plausible, did not have many remaining tenants, were likely to have relatively high emissions and were not the newest, most desirable buildings, known as Class A+.
They also used a financial model assuming conversion to energy-efficient “green” apartments to determine whether conversions would be profitable for developers on average. Their analysis found that the average conversion project in Seattle, Portland and Los Angeles wouldn’t be financially feasible, while similar projects in New York and San Francisco would pencil out. Seattle rents likely aren’t high enough to offset conversion costs on the average building and amount to enough profit for a developer, Van Nieuwerburgh said.
To incentivize conversions, local governments could loosen zoning and building code rules, streamline permitting, or offer property tax breaks. Developers could also tap into federal funding for climate adaptation in the Inflation Reduction Act for some conversions, the researchers note.
But tax breaks and other incentives are likely to face skepticism from those who argue cities like Seattle need an influx of affordable housing, not handouts to for-profit developers.
Seattle and other cities will continue to grapple with those trade-offs. Over the next two decades, Seattle needs 112,000 new units of housing, according to recent county estimates. More than half of those are needed at prices affordable for people making less than half of area median income, or about $62,000 for a family of three in Seattle.
While the average Seattle conversion may not be financially feasible for private developers, Van Nieuwerburgh said, “that does not mean that there are no buildings in Seattle that are potentially good conversion targets.”