It’s no silver bullet. That’s what commercial real estate professionals say of office conversions. Yes, converting some outdated office buildings to other uses could provide a boost to the struggling sector. But there aren’t enough office properties that are good candidates for such a transformation.
But when it works? A conversion can bring new life to an office building that is struggling to attract tenants.
A good example is the recent sale of 130 E. Washington St. in downtown Indianapolis. Colliers recently brokered the sale of this 1922-built office building to Holladay Properties, a commercial real estate and development firm based in South Bend, Indiana.
Holladay plans to convert the 211,995-square-foot 12-story office building into an apartment project with first-floor retail and second-floor entertainment tenants.
Holladay will begin the conversion in the late spring of this year.
Jordan Corbin, vice president of development at Holladay Properties, said in a written statement that Holladay will turn 130 E. Washington St. into a 180-unit apartment project.
Given that so many office properties aren’t a good fit for conversions, what made 130 E. Washington St. such a good candidate?
Rich Forslund, executive vice president for office at Colliers’ Indianapolis office, said that 130 E. Washington boasts both an ideal location for multifamily in the heart of downtown Indianapolis and a floor plan that construction crews can more easily convert to residential apartments.
“The physical attributes of this building are unique,” Forslund said. “It almost works as two buildings in one. There are multiple elevator banks in the building, one on the west side and one on the east. That allows you to cut up the building to make it easier to convert to residential.”
That coupled with the existing depths and widths of the floor and window lines makes 130 E. Washington an ideal candidate to experience a second life as a multifamily property, Forslund said.
“Everyone throws adaptive reuse at the wall as the answer to what to do with older office buildings,” Forslund said. “But the majority of buildings out there don’t make any sense for a conversion to residential. One of the huge reasons is the depth of the floors. They are too deep. It takes too much to get to the windows. This building doesn’t have that issue.”
The building’s location is important, too, Forslund said.
“It is located in the heart of downtown, right in the mix of the fun stuff taking place there,” Forslund said. “The Pacers are there. The Fever are there. All the restaurants are there. It is a good spot for renters who want to be in the center of that action.”
Rachel Patten, senior associate with the Colliers Midwest Capital Markets team, said that 130 E. Washington St. is a rarity today. There haven’t been many office sales in downtown Indianapolis since the COVID pandemic.
“These sales have certainly been few and far between,” Patten said. “There have been talks. But there is a lack of sales comp data for office right now.”
Patten and Forslund did agreed that the flight-to-quality movement is in force in the Indianapolis office market.
Tenants today are more often moving into higher-quality space. They are willing to pay the higher prices that come with this type of office space because they are so often renting less of it, they said.
Forslund pointed to the Bottleworks District, a mixed-use development in Indianapolis’ Mass Ave neighborhood in the northeast side of downtown. That development is attracting tenants looking for high-quality office space.
But what happens to office space that isn’t of a higher quality and isn’t a good candidate for conversion?
Forslund said that the commercial industry is in the early years of figuring that out. He did say that as more major companies push to bring their employees back to the office, these companies, many of which shed space during the pandemic, might need to lease additional square footage to make room for the workers that are returning to the office.
“That is why the flight-to-quality is happening,” Forslund said. “Companies are leasing higher-quality space as a motivator to get their employees back to the office. I don’t think we are ever going back to where we were before COVID. There was always going to be a post-COVID look to our office utilization. But it will be interesting to see how close it gets to where we were before the pandemic.”
And when it comes to office conversions? That will play a role in reducing the supply of older office space. But it won’t make a major dent, both Patten and Forslund agreed.
Conversion projects not only need the ideal property, they are often expensive, too.
“It’s about finding the right developer for a project,” Patten said. “That can be challenging, too, finding a developer that wants to take on a conversion.”
