Four years in the making, the 10-story Art Studios in downtown Denver began leasing 192 studio apartments last fall. Converting the former Art Institute of Colorado building was a challenge, taking longer and costing more than anticipated due to pandemic disruptions and inflation. But in the end, it was less expensive than demolishing the mid-century structure and starting from scratch.
In six months, about 30% of the apartments are rented. That’s less than where developers at Nichols Partnership had hoped to be at by now. But leasing is picking up now that it’s spring, said Melissa Rummel, Nichols’ vice president of development. The family-owned developer has a history of saving old commercial buildings and figuring out how to adapt them into new uses.
“Would we do Art Studios again? We would, but I think the economics would be quite different,” Rummel said, adding that they acquired the building in 2019. “At Nichols, we build to hold and we sell when it’s right so there’s no forced need to sell it. But the truth is, with high interest rates now, the economics are different than (in 2019). Rents are higher but construction costs are higher. But the true break is that 8.5% interest rates are quite different and very painful.”
Call it a real-time litmus test for one of the most talked-about trends in commercial real estate today. As remote workers recovered from the pandemic, not everyone made it back into the office. Landlords discovered that tenants didn’t need as much space and nearly one-third of downtown Denver’s office buildings are vacant. Meanwhile, affordable housing is still an issue.
At some point, more than one person had an idea: Why not convert those empty offices into a place for people to live?
Four years after office workers switched to remote work, downtown Denver continues to reel from office buildings that are nearly one-third empty, according to commercial brokerage research firm CBRE. That excludes the so-called “zombie buildings,” where leases may be signed but few workers actually show up in person. The impact on the downtown economy has been devastating for coffee shops, restaurants and retailers left to compete for a dwindling number of customers.
The city of Denver is aware.
Last year, the city worked with architectural firm Gensler in Denver to figure out whether office-to-residential conversions could be possible. It also launched a pilot program specifically targeting commercial-to-residential conversion in upper downtown. At the state level, lawmakers have proposed a bill, with support from the state’s economic development agency, to provide $5 million in incentives to interested developers willing to give conversion a go. The bill is “on a good path,” said sponsor Rep. Matt Soper, a Delta Republican.
But it’s just not that easy, says, well, mostly everyone.
Barbara Pahl, chair of Historic Denver’s preservation policy committee, testified in support of the bipartisan House Bill 1125 to provide incentives to developers, although she thinks the state should quintuple the incentive to $25 million. Not all older buildings are suited for such conversion and for those that are, it’s going to cost way more than that, she said.
“In my view, it’s economically better. It’s better for the environment and climate,” Pahl said. “That said, it is difficult and therefore expensive to figure out what to do with that big floorplan and that’s what puts those buildings from the more recent past of the 1970s and 1980s at risk.”
Why most offices make terrible apartments
Back in the day when there was no air conditioning, multi-story office buildings were built on smaller lots and had windows that opened for air flow. Those are considered excellent features for residential conversion candidates.
But office design evolved to provide more efficient buildings with central heat and air; larger floor plans where the bulk of employees sat in the middle while executives got the windows and corner suites; and parking spaces for everyone.
While good for office workers, those features make it costly to carve up spaces into suitable living quarters.
“If you take most office buildings and convert them to residential, you’re going to end up with a whole bunch of bowling alleys where you’ve got a set of windows at one end of your apartment or your condo and then nothing for 100 feet,” said Marcel Arsenault, founder and CEO of Real Capital Solutions. “Office buildings have large floor plates and therefore, they can’t really be converted into residential. That’s 90% of the office buildings.”
Arsenault said he did his first office-to-residential conversion in Cherry Creek in the late 1990s. Underused offices were converted to 44 condos, now named Catalonian at Cherry Creek at 180 Cook Street. He said he made a decent profit. The numbers, timing and property all have to be right.
“When we looked at 180 Cook Street, the price of the real estate had fallen because it was becoming more and more empty as an office building. … And it was worn out. It was an old office building, and so the price was low,” he said. “And then if you looked at residential in Cherry Creek, residential values were high. Everybody wants to live in Cherry Creek. We could have upgraded the office building, tore everything out, put in new elevators, a new lobby, but when we ran the numbers, it made more sense to do it as residential.”
Architectural firm Gensler developed a tool to figure out which commercial properties have high potential for residential conversion. It analyzed more than 800 office buildings in the U.S.
“What we’ve found generally across the nation is that about 20% of the buildings studied make great candidates for conversion,” said Josie Hyde, a senior associate and design manager at Gensler.
In Denver, the firm looked at 69 downtown Denver office buildings and deemed 42% were “good candidates” or could have “possible success” for residential conversion. That’s higher than the national average because the firm got additional feedback from the city, Hyde said.
Newer buildings, or those built in the past 50 years, are less suited for conversion because they tend to have too much parking; were built with “curtain wall facades,” which are essentially immovable interior walls; or are just too deep, resulting in bowling alley-like apartments. On the other hand, older buildings with the opposite features are more appealing, plus they’re often in historic districts and may qualify for conservation credits.
In Denver, the four office buildings most compatible with residential conversion in a Gensler study were:
- The University Building, 910 16th St.
- The Logan Building, 899 Logan St.
- 1875 Lawrence
- Lincoln Crossing Tower, 1775 Sherman St.
>> View Gensler study
“None of the buildings in this study are meant to say that these are the ones that should be converted. It’s more, ‘Here’s a stock of buildings that we should all be aware of and to start to look at a broader picture of which ones are appropriate or not,’” Hyde said.
But there were other factors that go beyond the tool and are unique to the region, added Alex Garrison, a senior associate and design director for Gensler in Denver.
“What happened in the ’50s and even up to 2008 is that buildings were then built in these kinds of waves, the boom and bust cycles,” Garrison said. “Those buildings are suffering because they lack what is typically associated with Class A, the floor-to-ceiling glass, and they’re starting to suffer from energy performance. Denver and now Colorado have these energy goals for 2030 that start to penalize buildings if they’re low performers and these older buildings just can’t keep up with this kind of sea change that’s happened.”
Residential conversion isn’t new
Conversion isn’t unheard of though. Just take a look at the number of charming old, historic buildings that are now residential lofts. Companies also haven’t abandoned a downtown Denver address — there are still multi-story office buildings under construction in the city. But some of the older facilities are dowdy and in need of an upgrade if they want to attract new tenants.
Success has a lot to do with timing and location. For Nichols Partnership, which developed Art Studios, they had great success back in 2015 after converting the former Hotel VQ next to the Denver Broncos stadium into Turntable Studios, a 13-story complex with 179 studio apartments.
“That was quite a bellwether project because it had never been done in Denver before. Everyone said, ‘What are you doing? One hundred and seventy nine studios in one building and they’re all 340 square feet? No one’s going to live there,’” Rummel said. “In the end, it leased up faster than any other building at the time.”
Nichols Partnership is also behind the new five-story office building One Platte, at 1701 Platte Street in Denver. Construction started one week before the pandemic. It was completed in spring 2022. It’s now 90% leased.
“It’s a testament to location and building on Platte Street,” Rummel said. “But we are signing leases today in an office environment that is different from before. Many companies are still absolutely investing and realizing that times have changed and maybe you don’t come into the office every day. They’re shrinking footprints, but they’re still definitely making significant investments in downtown.”
The city of Denver’s Adaptive Reuse program, which started with a plan in 2020, used federal American Rescue Plan Act funding last year to study the office conversion with Gensler. When results were shared last August, the city also announced a pilot program to coordinate the conversion of office buildings to residential properties. It began taking applications in August from interested developers and owners.
The polygon-shaped area, bordered by Lawrence Street, North Speer Boulevard, Colfax, North Sherman and 20th Street, includes dozens of buildings but to join the pilot, buildings must be at least 30 years old, have 50% or greater vacancy rates and must be converted into residential properties.
Three very different buildings have been approved so far, and the city hopes to find two more to join the program.
- The Symes Building, the eight-story building at 820 16th St. was the tallest building in the city when it was completed in 1906 and the first with steel frames, according to History Colorado. It housed 261 offices and retail on the ground level, including a Woolworth’s store 15 years later.
- The Petroleum Building at 110 16th St. was the tallest building in town when it was built in 1957, and originally housed mostly oil-industry companies.
- The youngest is the 16-story building at 475 17th St. that was built in 1975, according to commercial real estate listings.
Plans were submitted in February to turn 475 17th St. into 210 affordable and market-rate apartments, said Nick Allen, developer manager for Revesco Properties, which is also behind the mixed-use River Mile project on top of Elitch Gardens. But they’re still early in the process to study the feasibility so costs and timelines are not yet known.
“There’s certainly a gap in funding, and we’re ascertaining how large that gap is,” Allen said. “Certainly high interest rates, or relatively high interest rates are a part of that. Construction costs are a part of it. And also just meeting current codes in a 50-year-old structure is also a factor.”
475 17th Street
Owners of the 16-story office building at the corner of 17th and Glenarm are considering residential conversion because of the lackluster office market. Plans were filed to convert it to a 210-unit apartment complex, according to developers from Revesco.
The city’s pilot program doesn’t offer any funding, at least not yet, said Jennifer Ramsey, senior development project administrator for Denver’s Adaptive Reuse Program. The program is a way for city planners and code reviewers to learn what issues developers face and provide technical assistance to developers. She said that from a zoning perspective, the city’s zoning already works well for residential conversion and there’s no parking regulations or other restrictions that make development more difficult.
“Our intent is to understand what are the regulatory, procedural and financial challenges that adaptive reuse faces in Denver. How are they different between the two different sizes or scales or scopes of development and what can we do to make that easier,” Ramsey explained. “There is no guarantee that there would be an official fully funded, fully staffed adaptive reuse program similar to other programs that we know of. But there’s also no guarantee that that would not happen. We’re still trying to understand the best way to tackle a very complex issue.”
One perk of participating is that developers now have Ramsey as a project coordinator who can guide them through the permitting and review processes, which can involve multiple city departments. But a major benefit is on-time reviews, which gives developers specific dates that reviews will be completed. Otherwise, they’d essentially take a number and wait in a queue.
That’s huge, said John Borst, owner of the Petroleum Building, who’s been working on a residential conversion going on three years after a buyer for the office tower pulled out when the pandemic struck. Borst has been a long-time supporter of The Colorado Sun.
“Streamlining that permitting process is a big deal,” Borst said. “These reviewers review about 1,000 projects all the time. Our drawings are 300 pages long and to get somebody to sign off on this and sign off on that, it’s a big deal.”
The Petroleum Building
The 14-story, five-sided Petroleum Building at 110 16th Street was completed in 1957 as the headquarters of the Petroleum Club. According to National Historic Register of Places documentation, it housed “the only savings and loan drive-through service” at the time and had amenities like air conditioning, artesian water and high speed passenger elevators. Today, the office tower is more than 70% vacant and is working on a residential conversion.
But it’s already taken a long time. He said residential conversion made more financial sense three years ago, because today’s higher interest rates and construction costs have made finding financing a major challenge. And keeping it as office space doesn’t seem possible. While companies are still signing new leases or renewing them, the older offices are left behind, unable to compete with the newer and nicer Class A facilities. The 67-year-old Petroleum building is more than 70% vacant.
“We really want this project to happen and move forward and, again, selfishly, because it’s our building. But there’s a greater story here for downtown,” Borst said. “There’s a bigger narrative outside of just our project. These buildings really need to do something. And if they can be incentivized, I think downtown won’t turn into the Portland’s of the world.”
Finding alternative funding
Borst hasn’t given up, though.
In the past couple of weeks, he’s applied for a historic designation to be eligible for historic tax credits, though the process could take a year. He also testified in support of House Bill 1314, which would expand the $10 million of preservation tax credits by another $5 million for property owners who preserve older commercial buildings with 50% dedicated to rental housing.
“We have a project that has been approved for permit but we are unable to build simply because this project is not currently economically feasible. We are not the only ones. Every developer or building owner that we’ve spoken to is considering this adaptive reuse program is currently struggling to make them pencil,” Borst testified. “The message here is greater than our building. … There is no question that this bill will create a real incentive for these adaptive reuse projects and their ability to get built.”
Barbara Pahl, who besides her work with Historic Denver also spent 35 years at the National Trust for Historic Preservation, said that preserving older office buildings has been successful when it involved tax credits or other incentives.
“It’s harder for some of those 1970s, 1980s buildings to be converted than it was for the conversions that have been done for 50 years in Denver and elsewhere. Take an old mill and convert it to housing, or old warehouses, that was a lot easier,” Pahl said. “But even those conversions benefited from historic tax credits that were passed, thanks to people like Dana Crawford, frankly. … Colorado was the third state to pass a credit in the country, the first being Maryland and then New Mexico, in 1990.”
Crawford is known for leading the revitalization of the city in the 1960s and that of Larimer Square at a time the city was razing old buildings. The tax credits help any gaps in funding developers face, especially in this era of high interest rates.
Cities around the globe are trying to address revitalization with various forms of financial incentives. In Calgary, they offer a subsidy of $75 per square foot for conversions but there’s a limited number of buildings that can apply.
“And what happens when you continue the life of an existing building: Two things,” Pahl said. “Demolition goes to the landfill (so) you don’t have that. Number two, you save carbon emissions, because all the carbon it took to build that building, especially if it’s steel or concrete, you’re going to reuse. It’s also nice because it helps in a city like Denver to show how the city changes over time. Here’s some buildings from our earliest founding up until the boom years in the 1960s and ’70s. We have stories and architecture represented in all of those periods as opposed to tearing them down.”
But will people continue to return to downtown?
According to Placer.ai, which tracks foot traffic in urban areas nationwide, Denver falls in the middle of the pack of major cities and their office recovery. As of February, Miami is the closest to full recovery, off just 9.4% from February 2020, followed by New York, at 14.5%. Denver is off by 34.2%, just below the national average of 31.3%.
Meanwhile, city apartment vacancies are about the same as they were back in February 2020 before the pandemic struck. And rents for Denver are about 11% higher, according to ApartmentList. That’s an indication that there’s demand downtown for a place to live.
“Our hope,” said Rummel, with Art Studios, “is that by giving a building that doesn’t have a primary use as office anymore and being able to convert it to residential, we are improving the streetscape, the city, and we’re helping people stay downtown and create safety, create vibrancy and aiding all the businesses that need people in their shops and restaurants.”