- The real-estate giant Hines announced its first office that would be converted to housing.
- The firm purchased a downtown Salt Lake City office and plans to turn it into luxury housing.
- With office vacancy rising while apartment vacancy falls, more are looking at conversion.
Office buildings at the core of big city skylines are known for attracting flashy, well-funded tenants that want to use the properties to sell their image of prosperity.
Nowadays, more companies are moving out more than in, leaving building owners in the lurch and desperate for new forms of income. Hines, a private-equity giant that owns more than $90 billion in real estate, says it has the answer, at least for one of Salt Lake City’s most recognizable buildings, the 24-story South Temple Tower.
Hines on Thursday announced it purchased the landmark building after a rash of exits by tenants resulted in occupancy falling by 0ne-quarter since 2018. The building had been drawing companies from a variety of industries, including legal, engineering, and investment banking. The opportunity, Hines says, is in residential housing, where demand and rents have increased as the population of Salt Lake City has boomed to record highs. In store are 255 luxury rentals within walking distance of Temple Square and the city’s business district.
This is the first time Hines has tackled an office-to-residential conversion, which are notoriously difficult, costly, and time consuming. In New York City, the One Wall Street tower in the center of the financial district is only now ready for condo sales after a nearly eight-year construction, the New York Post reported. But the conversions are likely the tip of an iceberg, with remote work leaving leased offices sparsely populated and vacancies rising to levels not seen in nearly 30 years.
What’s more, apartment rents are repeatedly setting records, attracting investors who predict multifamily properties will provide steadier income than offices and outpace the inflation eroding returns in many other asset classes.
Hines, which owns real estate globally, also acts as a third-party manager to an additional 373 properties, giving it a behind-the-scenes look at how different real-estate assets perform. Dusty Harris, the senior managing director at Hines who worked on the deal, told Insider that this purview helped inspire this deal.
“With all of the challenges of the pandemic, we had a front-row seat of the challenges that office buildings were facing,” Harris said.
He said South Temple Tower was just 50% leased, an unsustainable level that’s in stark comparison with the occupancy of Salt Lake City’s apartment market, which has its lowest vacancy levels in 20 years, according to a study by the Gardner Policy Institute.
“This leads us to a natural question: What do we do with office buildings that we either own or don’t own that are struggling?” Harris said. “Housing is a natural fit.”
Hines’ project is not without its challenges, the primary being the expense of renovating a building from the 1960s and converting an office floor plan into apartments. Harris said the construction would likely cost more than an equivalent new build.
The company declined to disclose the size of the deal, though the Salt Lake County Assessor’s Office this year valued the property at just under $56 million.
The challenges of conversion
High construction costs make office-to-residential real-estate conversions a hard sell, even if leasing slows. For example, an office building with only modest lease income might have a better return and lower costs with a renovation, versus a conversion.
State and local regulations, and the associated relationships, must be managed.
The conversion of One Wall Street, a historic office building that originally housed the Irving Trust, was endorsed by Mayor Eric Adams of New York City and Gov. Kathy Hochul of New York, no doubt easing the process. The path is now open for more conversions, with the Real Estate Board of New York estimating 10% of the city’s office portfolio could be turned into housing.
In the case of South Temple Tower, the downtown Salt Lake City office market has underperformed suburban offices in the metro area, Harris said. The state’s many technology employers have largely focused on suburban offices close to the campuses of Brigham Young University in Provo, Utah, and the University of Utah in Salt Lake City, he said.
There are office buildings that wouldn’t work for conversions, including the biggest properties, which would make it difficult to provide apartments with enough natural light. South Temple Tower, Harris said, has a floor plate that’s 40% smaller than the usual office building, a feature that had hurt its leasing in the past but makes this conversion easier. It will still require renovations of the exterior wall to add more windows.
Similarly, the property didn’t have enough parking for office uses but has a good ratio for residential use.
South Temple Tower was previously owned by the investment firm Maier Siebel Baber, which bought the property in 2013. The company renovated it in May 2017 before falling delinquent on a $29.6 million loan later that year. In 2018, the company refinanced the property with a $41.5 million loan. Trepp data at the time showed it was about three-quarters occupied but many of its leases at the time were set to expire well before 2021.
A leasing website from CBRE showed multiple vacancies as well.