Real Estate

Many Portland Office Spaces Are Empty. Why Aren’t They Being Converted to Housing?

Money, regulations, and seismic upgrades are sticking points when it comes to turning offices into apartments.

By Connor Radnovich January 25, 2023

Image: SanQian

When the coronavirus pandemic hit Oregon, those who could work from home did. Nearly three years later, many still are. Office vacancy rates in downtown Portland were sitting around 26 percent in late 2022. While there are some efforts to reinstate on-site work to more closely resemble prepandemic paradigms, a lot of office workers say they prefer the flexibility that comes with hybrid or remote work.

It’s a problem for building owners with fewer tenants to pay rent. And fewer people downtown means less support for the businesses that traditionally catered to office-goers.

But it’s also an opportunity. For a city with a faltering downtown, a worsening homelessness crisis, and a need for thousands of new housing units—preferably near employers and public transit—converting unused office buildings into residential units and bringing more people downtown seems like a win-win.

“We have a serious need in general, and [for] affordable housing in particular, and we have lots of need for that housing to be in the central city,” says Andrew Fitzpatrick, the city of Portland’s director of economic development.

For the better part of a year, representatives of architectural businesses, construction companies, development firms, and local governments have scoured downtown for suitable office buildings to convert. So far, no projects have emerged.

The holdup—as is frequently the case in business deals—is money, as those within the industry insist these projects can move forward only with some kind of public assistance or statutory modifications. One reason costs are so high: earthquakes.

Portland might not sit atop a major fault line like, for example, Los Angeles does, but it’s close enough to the Cascadia Subduction Zone that there could be severe ground shaking and damage to buildings if “the big one” ever strikes.

So, the city has added seismic design requirements over the years to its building codes to keep structures standing and people safe. If a Portland developer wants to convert an older building that doesn’t meet current seismic code, they would have to bring it up to code—which could mean an additional cost of $50 to $125 per square foot, or even more, according to those in the industry.

With those seismic upgrade costs, it becomes effectively as expensive to change an office building to a different use as it would be to erect a new building at a different location, or even tear down the existing structure and build anew.

“The crux of the issue is the cost to do the renovation; it doesn’t make economic sense,” says Michelle Schulz, principal at GBD Architects in Portland. “[The seismic upgrade] is the biggest number that’s tipping the scale.”

In cities with less risk of earthquake damage, office-to-residential conversions are being implemented at a growing rate. Success stories include the 435-unit Park & Ford apartments outside Washington, DC, a former office building that now boasts modern, luxury apartments with a fitness room, sun deck, and pet spa.

According to an analysis by real estate listing site RentCafe, adaptive-reuse apartments are up by 25 percent in the past two years compared to prepandemic levels, and nearly half of those apartments (11,000 or so) were adapted from former office buildings.

The main candidates for conversions are Class B and Class C office buildings—those that are smaller and contain fewer employee amenities such as on-site parking, in-building dining options, gyms, or daycare services. (Class A buildings, with more of those amenities, remain in high demand for office use.)

In Portland, those Class B and C buildings are typically older, unreinforced masonry constructions—the very buildings considered most at risk for collapse during a strong earthquake. This means that the types of office buildings that would be targeted for conversion in other cities are disqualified as too expensive in Portland.

This is where the industry hopes local governments can step in.

Fitzpatrick says office-to-residential projects are indeed a priority, and the city is looking into a variety of options that would make the projects more economically feasible.

These include streamlining the building permitting process, adjusting seismic retrofitting codes to align with other cities, and approaching the Oregon Legislature with respect to new tax credits and money for grants or no-to-low interest loans.

Development incentives would not be unique to Portland. The city of Calgary, Alberta, has offered a grant of $75 per square foot up to $10 million for office-to-residential conversion projects. Chicago is offering a variety of tax and other incentives for apartment conversion projects in its financial corridor, as long as 30 percent of units qualify as affordable housing.

One proposal in the works at the city would exempt qualifying conversion projects from system development charges, fees paid by new developments to offset expected increased use of water, sewer, parks, and transportation infrastructure.

The reasoning, Fitzpatrick says, is that office buildings slated for conversion would already be hooked up to the city’s water and sewer systems, so it doesn’t make sense to apply all the typical fees.

But to qualify, Fitzpatrick says, a residential conversion project would need to include a “certain amount” of affordable housing—i.e., apartments with rents that are accessible for lower-income residents. Industry experts say this requirement can make a conversion project less appealing to developers.

Another “viable, but untested” option to support affordable housing, as floated by Multnomah County Commissioner Susheela Jayapal, is to leverage long-term rental assistance to support the conversions. Jayapal says she is interested in office-to-residential projects as a way to combat the city’s homelessness crisis.

“Office-to-apartment conversion would be a good idea whether we had a homelessness problem or not,” says Jayapal, who has been in conversations with developers about these projects since summer 2022. “It’s a particularly good idea since we do.”

No one is suggesting conversions alone could solve homelessness in Portland. The need is too great, as evidenced by Mayor Ted Wheeler’s recent moonshot proposal to build 20,000 subsidized units in the next 10 years.

“We would not argue that it is a silver bullet,” Fitzpatrick says, but it would “have an appreciable impact in addressing those issues.”

But first, good candidates for conversion need to be identified.

Gensler, a San Francisco–based architecture, design, and planning firm, created a tool for its clients across North America to help determine if a building could be suitable for a conversion project. The tool produces a scorecard after analyzing the “vitals” of a building, including its shape, ceiling heights, number of elevators, surrounding neighborhood, access to transit, and parking.

It’s not fully known how many office buildings might be eligible for conversion right now, though an analysis commissioned by the mayor’s office is ongoing with Gensler’s involvement. The results of this survey could be instrumental in dictating how the city applies any incentives, says Duanne Render, a senior associate at Gensler.

But on the other side of the cost equation, there could be a tipping point on the horizon.

Maurice Reid, co-studio director in Gensler’s Portland office, says vacancy rates are expected to rise as tenants with an increasingly remote workforce reconsider their office footprints. Whether the changes are due to an acceptance of remote work for more employees, or lease agreements coming up for renegotiation, as tenants withdraw and profit margins shrink the financial incentive for owners to sell increases.

The question for building owners, Reid says, soon becomes: How long can I sit on an empty asset?

Suddenly the prospect of selling a building for an office-to-residential conversion for what previously would have been a low price becomes much more appealing.

“We’re stepping up to this,” Reid says. “The story is still that people are not pulling the trigger on it yet, but people are waiting to see what happens when you cross over that line.”