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January 27, 2025 Deal Watch

Increasing number of owners/investors eye office space conversions

Michael Goman
COSTAR 1344-1360 Silas Deane Highway, Rocky Hill
By Michael Puffer

Two years ago, East Hartford-based commercial real estate consultancy Goman+York performed about three market analyses each month, looking at the potential costs and benefits of converting office and retail properties into new uses.

Now, the firm — which has expanded its reach outside the state with new hires, but still does about half of its work in Connecticut — is studying possible conversions for three to four clients weekly, according to Goman+York Principal Mike Goman.

“I think 2025 will be a time of enormous possibilities,” Goman said. “The market has stabilized, and everybody has accepted there won’t be as much demand for office as there was seven or eight years ago.”

The increased activity, Goman says, is being driven by office building owners’ increasing acceptance of lower demand for their space, as it currently exists, and local and state governments’ willingness to partner in redevelopment projects.

Institutional investors are also showing greater appetite for investment opportunities.

Pension and hedge funds generally aim to have 5% to 10% of their investments in real estate, Goman said, but they pulled back during the past two years as construction costs soared and interest rates doubled.

Those funds are poised to flow back into commercial real estate to realign with traditional benchmarks and take advantage of bargains in some real estate classes, including office properties ripe for conversion, Goman said.

“They are saying it is a good time to get into the market, an opportunity to buy stuff less expensively,” Goman said. “We are predicting 2025 could be a very interesting year. We are seeing so much interest in market analysis and financial feasibility of projects, both new developments and redevelopments. We are seeing this year off to a raging start.”

Banner year

Goman said about three-quarters of the market analyses his firm conduct are for possible office property conversions.

He declined to disclose specific Connecticut projects Goman+York is involved in, but several new ones have surfaced just this month:

  • A vacant 20,000-square-foot North Haven office building, at 23 Maiden Lane, that traded hands on New Year’s Eve for nearly $1.3 million is being eyed for a partial apartments conversion.
  • A Long Island family that is heavily invested in Waterbury’s downtown is planning to buy a 23,000-square-foot office/retail building from the city, at 24-30 Bank St., and convert it into apartments over refreshed retail spaces.
  • A team of investors led by Hartford-based real estate development and investment company Staypoint Properties in late December paid $4 million for an 83,392-square-foot Rocky Hill office building and nearby restaurant pad site, at 1344-1360 Silas Deane Highway, with plans to transform the property into as many as 75 apartments.

Nationally, office conversions are coming off a banner year, according to real estate services firm CBRE. As of November, 73 conversions had been completed in 2024 in the U.S., with another 30 projects scheduled for delivery by year-end — the most since CBRE began tracking that data in 2016.

This year is expected to be even more active, CBRE said, with 279 conversions either underway or planned/announced.

As of the third quarter of 2024, 71 million square feet of office space, or 1.7% of U.S. office inventory, was planned for, or already undergoing conversion.

The activity, CBRE said, is being driven by historically high office vacancy rates and falling asset values, which have prompted public/private partnerships that are incentivizing conversions, particularly to apartments to address a nationwide housing shortage.

“The pipeline of office conversions is expected to grow as cities offer more incentives and sellers of troubled assets further discount prices, particularly for older buildings,” CBRE said.

Myles Brown

Myles R. Brown, principal with Hartford-based Amenta Emma Architects, said his firm works on “more than a half-dozen” office-to-apartment conversion studies in a year. It’s not a huge portion of Amenta Emma’s workload, but it has increased since the pandemic.

“There’s always been vacant office buildings, but there has certainly been an uptick since the pandemic,” Brown said.

Amenta Emma’s studies explore how many apartments a building can produce, conversion costs, local land-use regulations and even possible government funding programs.

JCJ Architecture, a national firm with a Hartford office, on average has worked on one office-to-apartment or office-to-hotel conversion per month over the past year, said Principal Harry Wheeler.

Harry Wheeler

That’s up from one or two conversion projects JCJ worked on annually prior to the pandemic, Wheeler said. He also noted that conversion work isn’t concentrated in any one city.

“It’s not just in any specific market,” Wheeler said. “It’s across most metropolitan areas. It’s not just affecting New York or Boston or Hartford. It’s happening everywhere, which gives validity to the shift in the office market.”

Conversion challenges

Despite the increased activity, not all buildings are ripe for conversion, experts said.

Typically, an official building eligible for conversion must be at least 50,000 to 60,000 square feet, Brown said. Conversely, converting large office buildings with deep floor plates is a challenge because apartments need window access.

Voya Financial’s 470,000-square-foot Windsor headquarters, at One Orange Way, provides a good test case. Set on nearly 77 acres, the building was completed in 2007 at a cost of $100 million. It went on the market in 2022 as Voya significantly shrunk its office footprint.

Shawn McMahon

Shawn P. McMahon, a managing director with real estate services firm JLL, said an architectural firm was hired to study the possible transition of the building and surrounding land to industrial and residential uses.

While the building remains in pristine condition, its broad and deep layout make it ill-suited for wholesale multifamily conversion, he said. But, the surrounding land could be developed into any number of uses.

McMahon is working with Windsor officials to explore alternatives.

Goman said most of the office buildings his firm has studied are around four to five decades old, and either functionally obsolete, or no longer fit market needs.

“These buildings were never meant to be forever buildings,” Goman said. “They are not Notre Dame or the Sistine Chapel. They were built to a budget. Your 40- to 50-year-old buildings are at the end of their lifespan, and the right answer in about 75% of cases is to tear it down. It’s too costly. It will never make financial sense.”

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