25% of office buildings could convert to residental, but rentable space drops 30%
NAREIM Architecture & Engineering Meeting takeaways
Sept 20-21, 2023
Roughly 25% of office assets could be viable for conversion to residential - with a sweet spot being buildings sized between 350,000 and 500,000 sq ft, with 45ft core to window distances and producing between 300-400 units.
As managers explore how to maximize office values, NAREIM members attending the Architecture and Engineering meeting in Chicago this week heard there were five key factors impacting office-to-resi conversions.
Floor plate design, which includes core-to-window distance as well as elevator ratios, was the most impactful factor on conversion potential, with 45ft core-to-window buildings offering a good chance of being convertible.
The four other factors included building shape, servicing (such as loading and parking), followed by site context (walkability/transit) and the building envelope. Different markets could result in factors being weighted differently, however members heard there was one element that typically ruled out any conversion: if there was only one set of exit stairs, conversion wouldn’t work.
While up to 25% of offices could convert, the true number is lower as not all assets will pencil out for a variety of building, design and market factors. Among those factors are:
Conversions to residential reduced floor efficiency (or the volume of rentable space) from an average of 94% to between 70% and 79%.
Be creative in how you use unrentable space. In one case study, gaps between two elevator banks were used as tenant amenity spaces - on every floor. Each amenity space had a specific use, including kids playroom, indoor basketball court, bike storage and work spaces.
Conversions prevent carbon emissions that would be produced during a tear down and rebuild, a saving that could help secure tax credits and financing for low carbon properties.
The Architecture & Engineering meeting also heard practices and updates on environmental rules surround PFAs; emerging case law and solutions to plastic pipe failures, particularly in multi family assets; lessons learned from a Net Zero case study as well as insurance strategies for 2024.
Mind the insurance gap:
On insurance, members heard about new alternative insurance products to consider as they sought to fill potential gaps in coverage and capacity including:
Structured programs whereby insurance was underwritten across a longer period of time, such as 7 to 10 years, versus annually thereby maximizing retained risk and transferring risk across a pro forma.
Parametric trigger products are also new insurance programs being brought to market whereby properties or insured for a specific event and not a dollar loss. For example, if a property was insured against wind speeds maintaining 115mph for 60 seconds, a policy would pay out irrespective of damage and losses.
Such policies are being seen as a means of hedging or filling gaps in capacity and coverage.
But there was one key strategy all managers were advised to follow:
Your property data has to be accurate and detailed to even be considered by insurance carriers.
That’s particularly true for data on secondary characteristics such as construction quality, cladding types, frame-foundation connections and roof sheathing attachments.
Providing data on these four building elements can “move the needle” in terms of premiums offered. One Miami asset case study revealed the delta between a poor data submission and a best-in-class data submission was $2.75m/year.
“Insurance is now financial engineering,” the meeting was told. “You will fall to the bottom of the barrel if your submission quality and data isn’t good enough.”
Other best practices shared during the meeting included:
Plastic is fragile
Plastic pipe systems can be fragile and fail faster than originally expected, sometimes forcing owners to replace entire plumbing systems. Among plastic pipes where issues are emerging are PEX, polypropylene and polyethylene pipes, typically following stresses caused by oxidation.
As the EPA considers whether to label PFAs a hazardous substance, managers can conduct asset due diligence looking to a property’s historical uses, ground water and surface assessments, surface bodies, and surrounding property uses.
Net Zero case study
For Net Zero buildings, consider converting existing assets to net zero. The carbon savings of conversion could be greater than the emission penalties of demolition and building new. Other best practices discussed include:
Leakage and the air tightness of assets is a key challenge for converting existing assets. Insulating to R40 in the roof and R30 in the walls was a key factor in achieving the owner’s desire for a 40% reduction in baseline energy use intensity (EUI). The firm also used the Superblock regenerative heat technology to recover 90% of the building’s heat.
Use ballasted solar as much as possible versus anchored solar panels to prevent the risk of roof leaks.
It’s also imperative to give clear rules and guidelines to tenants to achieve Net Zero, with the firm setting requirements on lighting power and plug load density.
The meeting also discussed professional development, skills, EV charging, alternative property type due diligence and ASTM updates among other issues.