With Austin office buildings 20 percent vacant, conversion to housing remains out of reach

Two years ago, with the office real estate market in Austin stuck at a 20 percent vacancy rate, Brad Stein took the first of two trips to other markets to see if some of the hundreds of thousands of empty spaces in downtown Austin and areas beyond could be converted into badly needed housing stock. What Stein saw in a 2022 visit to Chicago and another trip to Dallas last year was that housing space and office space are two very different puzzle pieces that don’t fit together without considerable and expensive alterations.

“It’s easy to throw the idea out, to say, oh, we should just do office conversions to residential,” said Stein, president of Intracorp Texas, which has three residential developments in the works in Austin. “I was curious myself, and so I toured an office conversion to a multifamily rental project. … I wanted to see: Is this something that we could do in Austin?”

While those kinds of conversions are feasible and successful in other cities with older office buildings and less demand for new development, which keeps land prices lower than in Central Texas, the reality quickly set in that office-to-residential conversion isn’t likely to take place locally in any major way unless office vacancies rise to 50 percent or higher.

Stein and other real estate experts who spoke with the Austin Monitor said it would take a precise mix of factors to make those conversions make economic sense locally.

Among them:

Properties need to be 30 to 40 years old and already in need of significant renovations and improvements;
Only buildings with floor plates of 15,000 square feet or less offer the ready access to windows and egress needed for residential use;
Vacancies would need to be high enough to force owners to essentially give away a distressed asset at or below its land value.

Unless an owner is several years or even decades into owning a building that is only half full, Stein said it’s unlikely that the time and cost of a conversion would be in any way attractive. Since the surge in Austin office space has taken place in the last 10 to 20 years, owners would rather wait out a downturn instead of taking on substantial new costs or exiting a project at a loss.

“The offices and the areas where people want to live, I think they’re just kind of too new,” Stein said. “And I don’t think that the owners and the lenders of these office (real estate spaces) right now … are really willing to take a huge loss to kind of sell them and get out of them.”

By most industry measures, office space in the Austin area sits at about 20 percent vacant, though that number doesn’t take into account the amount that has been subleased by major tenants who had signed on for full occupancy of some new buildings and then changed course. Aquila Commercial listed the central business district vacancy rate at 22 percent in March, with the Domain having the lowest area vacancy rate at 11 percent.

The persistence of the vacancy rate has become a regular point of conversation with developers, real estate brokers, architects and planners, with conversion as a far-off “what if?” solution.

The biggest obstacle to putting beds in place of desks and work stations comes from the far different space needs for the two uses. Centrally located bathroom banks won’t work for residential properties that aren’t offered in a dormitory style, which means expensive new water lines are needed throughout the structure.

The same is true for heating and air conditioning systems, with individual units needed for every living space rather than centrally located plants that serve an entire building or portions of them.

Brandon Townsend, principal and project director for Page architects, said the costs of office-to-residential conversions are so high that cities and counties would have to offer substantial incentives or fee waivers to make the process attractive.

Townsend said another reason older office buildings are the most viable target for housing space is that older properties were likely constructed below their maximum allowed floor area ratio because the local economy at the time didn’t justify the expense, even in a desirable area downtown.

Now that housing demand downtown is high, he said the most likely move would be to knock an underutilized building down and build to its maximum height rather than converting to apartments or condominiums.

“If you had a building that was built in the early 1980s or late 1970s, when Austin was kind of going through one of its growth spurts, there probably wasn’t a need to build an 800,000-square-foot office building, even though they had the ability to do it,” he said. “The demand just wasn’t there because the city wasn’t that big, and so they built maybe a 30- or 40,000-square-foot office building. Is it better to take that building and take it down and build the full capacity that that site can bear, to 800,000 multifamily?”

In the world of office space developers, most are exercising patience over the current state of the market rather than taking drastic moves like conversion, which would be even more expensive than in recent years because or persistently high interest rates.

Tim Hendricks, senior vice president and managing director of Cousins Properties, said his company and others are taking a variety of smaller steps to slowly increase vacancy including investing in renovating buildings to suit smaller, non-tech occupants, and slowing or outright halting new development to allow new businesses in the Austin market to soak up available space. Hendricks said conversions aren’t an attractive option for companies like his, which play purely in office space and would have to sell a property outright to a company more able to handle residential uses.

There is some potential in areas outside hot business districts where owners may have fewer options to address low office occupancy.

“What we have seen is pressure on the older suburban assets that aren’t able to provide the amenities that customers are looking for today. The capital that’s required to modernize older buildings – they are struggling. I believe they will struggle for a while when it relates to conversions,” he said. “There’s been a few folks that worked on converting office to residential, vertical residential and high-rise residential, with some of that going on in New York City.”

Hannah Rangel, vice president of built environment for the Downtown Austin Alliance, said conversion has been a regularly popular topic in recent years as the city has had to address the need for housing as well as the effects of vacant office space on surrounding businesses. Like Stein and others, her research shows that the combination of high costs, logistics challenges and the expected slow rebound of the Austin market will make full conversions almost impossible downtown and in many other areas.

What’s more likely, she said, is incorporating a mix of smaller professional businesses into currently available space. And Rangel is a proponent of short-term conversions for creative, lifestyle and other businesses that could keep office space active for 10 years or so, with a return to office when the market is ready. Another area of interest Rangel and the DAA have identified is equitable transit-oriented development areas, where the proximity to transit and possible incentives could make office-to-residential conversions at least somewhat feasible.

“It’s a totally worthwhile conversation to happen for Austin broadly outside of downtown. Things get really interesting when you start to think about class B and class C properties and kind of low-rise office parks,” she said. “We’re already making commercial-to-residential conversion, so even though I think we want to be sort of forceful in the conversation and say this isn’t a fit for downtown, that shouldn’t stifle the conversation because I think that those two Lego pieces do go together – sort of – in other submarkets in Austin.”