It’s not easy to change a boat into a car.
Atlanta real estate developer Gene Kansas said that’s the sort of challenge many of his peers are considering as they eye the region’s stock of aging office buildings and think about converting them into something else.
“(Boats and cars) allow you to get from one place to another, and they both can be great,” said Kansas, who specializes in adaptive reuse projects. “But I think the same thing holds true for a building. They were designed in a very specific way for a very specific thing.”
The post-pandemic economy has made it clear. Atlanta, like many cities, has too many boats and needs more cars.
Specifically, metro Atlanta is overflowing with old office buildings that are losing tenants to shiny new office spaces. The rise of remote work and hybrid schedules has companies rethinking how much office space they need. This is happening as metro Atlanta lacks enough housing options to meet the region’s population growth.
That imbalance has led some real estate professionals to consider adaptive reuse.
The city of Atlanta bought the 2 Peachtree Street building, a 41-story office tower that city officials plan to convert into hundreds of housing units.
Credit: Colliers
Credit: Colliers
The historic W.D. Grant Building, on Broad Street downtown, was recently acquired by Wolfe Investments and Bluelofts Inc., and the Texas-based companies plan to convert the 124-year-old structure into apartments.
Developer CIM Group opened in 2022 its office and retail conversion of the former Norfolk Southern office building on Ted Turner Drive. Such projects, along with several new downtown residential buildings, promise to add life to downtown streets.
Credit: Jason Getz / Jason.Getz@ajc.com
Credit: Jason Getz / Jason.Getz@ajc.com
The adaptive reuse attention is also stretching into the suburbs, such as a proposal in Brookhaven to transform an old office building in Corporate Square into apartments. A developer also plans to reuse a vacant office tower near Northlake Mall in Tucker to build more than 200 apartments.
But just like a boat needs more than four wheels to become a car, it’s not easy nor inexpensive to convert wide office tower floors designed for cubicles into flats with kitchens, bedrooms and bathrooms. There are plenty of office-to-residential conversion examples, including many in downtown Atlanta, but these projects remain a market niche, according to one expert at real estate services giant CBRE.
“This isn’t a game changer,” Julie Whelan, a CBRE global research leader, said during the National Association of Real Estate Editors conference in October. “This is going to be a factor in the equation of what the office market ends up needing, but it’s not going to certainly save all the vacancy that we see out there.”
When the pandemic hit, office buildings closed, and nearby restaurants, retailers and hotels took the blow of lost street traffic right in the chin, hurting not only those businesses but local tax revenues.
Emptier office buildings are not as valuable as fuller ones, and landlords seeing an exodus of tenants will be under pressure to pay off their mortgages and some might go into foreclosure. Some experts fear declining values of office buildings could lead to significant hits to cities, counties and school systems that rely on commercial property taxes.
Office leasing activity in metro Atlanta has slowed, in part due to economic headwinds and fears of recession, according to CBRE’s third quarter analysis. It dropped 31% year-over-year despite available office space increasing to nearly 29%.
Steve Smith, a principal at architecture firm Cooper Carry, said a lot of that vacancy is clustered within aging office buildings, which can include fairly recent construction.
“Buildings older than 2015 are literally not being leased,” Smith said. “Those Class B and Class C buildings are finding new ways to be used.”
Credit: Natrice Miller / Natrice.Miller@ajc.com
Credit: Natrice Miller / Natrice.Miller@ajc.com
Apartment demand, meanwhile, has been red-hot, causing rents to continually increase at rapid rates. According to Atlanta real estate services firm Berkadia, the effective rent in metro Atlanta was $1,715 at the end of the third quarter, a 6.1% increase from the beginning of 2022. The report also found Atlanta’s apartment vacancy rate is less than 6%.
Despite market trends, CBRE found office conversions remain rare across the country. From 2016 to 2021, the firm found 218 office conversions in the U.S., roughly 36 projects each year. The trend is beginning to accelerate, since more than 60 conversions are expected to finish by the end of 2022.
Even then, every project that’s been completed since 2016 and is currently in the development pipeline only comprises about 2% of the total U.S. office inventory, according to CBRE.
Kansas, the intown developer, is known for adaptive projects like Constellations in Sweet Auburn, which converted a century-old Southern School Book Building into co-working space.
“This is not as easy as pressing the ‘retrofit the office building into apartments’ button,” he said. Complexity adds cost.
Larger office buildings, like those downtown, present design challenges that are only complicated by a tower’s height. Scott Fleming, a principal at Cooper Carry who specializes in corporate office architecture, said concrete floor plates, wide hallways and office common areas have to be adapted on a case-by-case basis.
Credit: Natrice Miller / Natrice.Miller@ajc.com
Credit: Natrice Miller / Natrice.Miller@ajc.com
He said those redevelopment solutions often contribute to an adaptive reuse project’s charm.
“It creates opportunities that I call these unplanned happy little design elements,” Fleming said.
For example, the former SunTrust bank control center at 250 Piedmont Avenue is now the Altitude apartment complex, more than 20 floors of rental units that feature 8-foot-tall windows. An office tower in Peachtree Center, 230 Peachtree, was transformed in 2016, with much of the building becoming a Hotel Indigo.
Six towers in the Peachtree Center complex recently underwent a foreclosure, and some real estate observers have speculated one or more towers there could be appealing for new uses.
And the city’s best-known conversion, the former Sears office and warehouse that’s now Ponce City Market, has become a top destination.
Fleming said the rise in rental costs, especially in neighboring Midtown, make downtown an attractive location for office-to-residential conversions.
“The writing has been on the wall for a long time, but it’s just becoming more of a reality now,” Kansas said.
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