Houston’s office to residential conversion
Writer: Andrea Teran
February 2024 — In response to evolving trends in office models and the shifting dynamics of workplace preferences, cities across North America, including Houston, are reimagining the use of their urban spaces. A significant trend emerging from these shifts is the conversion of outdated office buildings into residential units, a strategy aimed at revitalizing urban centers and mitigating housing shortages.
“Cities really don’t have a huge choice in this if they want to protect their tax base, they’re going to have to do something about these buildings,” noted Kelly Farrell, residential leader at Gensler as cited by the Houston Chronicle.
The primary motive driving the conversion of office spaces to residential units in Houston is the high vacancy rates in downtown office buildings, exacerbated by the pandemic. With office vacancy rates soaring over 25%, according to AECOM’s Downtown Houston Office Conversion Study, the city faces a pressing need to repurpose these spaces to maintain the vibrancy and economic health of its downtown area. This shift not only addresses the issue of underutilized real estate but also aligns with broader urban development goals, such as increasing downtown residential populations and diversifying the use of spaces to include housing, retail, and leisure facilities.
To encourage developers to undertake office-to-residential conversion projects, Houston has been exploring various tax incentives and financial models. One proposal under consideration is offering developers up to 75% of the incremental increase in property tax values over 15 years, with a more generous program potentially covering 100% over 30 years if additional government entities participate. These incentives are designed to make conversion projects financially viable by offsetting the substantial costs associated with transforming office spaces into habitable residential units, including extensive renovations and compliance with residential building codes.
“When we (did the original) Downtown Living Initiative it was a fairly simple formula. … Anything we do here — if we do anything — is going to have to be a whole lot more complicated and focused,” Andy Icken, chief economic development official for the city, highlighted the complexity of such incentives to the Houston Chronicle.
One of the largest office-to-residential conversion projects in downtown Houston is the transformation of a 20-story office tower at 1801 Smith into Elev8, a 372-unit apartment complex. This project, spearheaded by Florida-based DeBartolo Development, exemplifies the potential for converting outdated office buildings into luxury residential spaces, complete with modern amenities such as indoor pools, fitness centers, and gourmet kitchens.
In the Energy Corridor, the conversion of the 19-story Three Westlake office tower into a 311-unit apartment building outside the downtown area. This project illustrates the potential for office-to-residential conversions even in submarkets that traditionally have strong office demand. It highlights a strategic approach to addressing both the surplus of office space and the demand for residential units in Houston’s diverse neighborhoods.
The trend of converting underutilized buildings extends beyond office spaces to include hospitality properties. As exemplified by the transformation of the former Hilton Houston Galleria at 6780 Southwest Freeway into a multifamily complex. A project led by Los Angeles-based developer Bryan Kang’s Dos Lagos Asset, with an estimated cost of $40 million.
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