By Anya Szentes and Kaylee Palak
Living in the midst of a global pandemic has meant adapting and re-imagining one’s daily life. The same is true for the real estate industry —particularly the commercial real estate market, which has experienced a shocking halt as a result of COVID-19.
Seemingly overnight, office buildings have become frozen in time as the trend of working from home has boomed. Malls have emptied as consumers have move increasingly to online shopping. And as the nation switched to streaming amid movie theater shutdowns, Cinemark — the third-largest movie theater company in the world — took a hit of almost $230 million. Likewise, as many as 25,000 retail establishments are expected to close permanently by the end of this year, according to a recent study published by Coresight Research.
Call it retail-pocalypse or office-pocalypse, but empty commercial real estate is a looming crisis for the blight they bring not just to cities, but also to their tax bases.
What if, instead, all that unused real estate were converted to housing? As American lives become more virtual and localized within their own homes, the idea of “home” has taken on greater importance.
With pent-up demand for housing increasing across the country, even the White House is encouraging conversions and reconstructions of empty commercial space into residential units. Recently Housing and Urban Development Secretary Ben Carson called for developers to collaborate with city officials and local councils on developing new projects that will address both of these issues.
“I don’t think it’ll ever go back to the way it was before, and there are a lot of people who are going to be able to work from home,” Carson said in a recent press release. “This is going to free up a lot of commercial space, which can be converted to affordable housing to take some of the pressure off.”
While commercial-to-residential conversions are mostly in the idea phase, as commercial real estate properties continue to empty out, they’re likely to be re-imagined in different ways. For some urban spaces, that might mean a complete transformation into something new. For others, it could be simply expanding and redeveloping.
One thing’s for certain: The decline in retail and office space driven by the COVID-19 pandemic is likely to continue, along with demand for housing inventory. But as some developers, investors and builders are beginning to realize, these two facts can work together to create more vibrant communities.
The Overlook at St. Gabriel’s, situated within Boston’s Allston/Brighton neighborhood, features 45,000 square feet of amenity space and a community of more than 500 residential rental units. Formerly an abandoned century-old monastery and church, this project — developed by Cabot, Cabot & Forbes, one of Boston’s oldest real estate firms —demonstrates how empty commercial space can be reimagined into residential living areas.
Beginning development in 2015, The Overlook at St. Gabriel’s was not converted as a response to COVID-19, though the property does reflect the city of Boston’s continued commitment to efficient conversion and use of space to address housing needs. Property conversions such as these are no easy task, said Cabot, Cabot & Forbes Executive Vice President John Sullivan. “Typically, the removal and new construction of a building can be more cost-effective,” he noted, “but during our conversion, zoning laws and historic protections set certain parameters for the development of the space. Our team embraced this challenge, leaning into the historic charm of the space and repositioning the church and monastery spaces to offer one-of-a-kind amenities and residential units.”
While working within these zoning and historic preservation laws, the team at Cabot, Cabot & Forbes preserved many features of the historical church and monastery, including stained-glass windows, ornate stairs and ceilings, and small decorative details — elements of the property now admired by residents and visitors.
The Overlook at St. Gabriel’s, although not a pandemic-induced conversion, demonstrates how one city is approaching empty real estate and utilizing space to address its growing population.
“The high barrier to entry within the Boston market requires developers to be creative,” said Sullivan. “At Cabot, Cabot & Forbes, we continue to seek properties prime for redevelopment that present unique value propositions.”
As the country gears up for winter, coronavirus cases are expected to rise. With numbers increasing daily, Illinois Governor J.B. Pritzker recently reintroduced restrictions on nonessential businesses. These mandates, originally issued in March, caused further shock to Chicago’s commercial real estate market — not to mention the landlords deprived of income.
For Chicago real estate investor Fangji Xu, who owns a number of residential buildings with storefronts, it was a wake-up call. “I have four different restaurant tenants,” she said. “Since the March lockdown, one closed and the rest either pay late or ask for discounts. If they want to stay, I keep them in there; if they don’t want to stay, I just let them go. What are you going to do?”
Among Xu’s properties is an art gallery in Lakeview that she launched with her partner in 2003. The gallery has since closed (not because of COVID-19), and with many small businesses struggling, Xu is exploring the possibility of turning the former commercial space into a residential unit.
“That building is zoned for either one, so I’m lucky,” Xu remarked, adding that the sheer space of the building could allow for both. “In a good neighborhood, [clients] are looking for convenience and price, and are not opposed to sharing space with commercial businesses — or renting a space that could serve as both their home and business.”
Xu, a former professional ballerina who moved to Chicago in 1986, is betting that demand will continue in Chicago’s residential market, especially in neighborhood locations away from downtown.
“Young people are staying here, and they’re still looking for places to live, where they’ll probably also be working remotely,” she added. “Turning vacant commercial space into for-sale or for-rent units may help address that need.”
Still, Xu holds out hope for her restaurant tenants. “People who work from home all day need neighborhood businesses and restaurants to go to,” she said, noting that a lasting effect of the pandemic might mean those people will be less willing to venture far.
In South Florida, where residential real estate is booming thanks to COVID-19 migration, which, in turn, is causing inventory to shrink, the team at real estate consultancy and project management firm Amicon has its sights set on rezoning commercial properties.
“We are not seeing a lot of developers discussing new commercial properties or bringing a new commercial product to market anytime soon, said Amicon Vice President of Business Development Jonathan Wieslow. “Rather, more developers and our clients are taking the steps toward getting existing land rezoned for other purposes, like converting to residential.”
While not every commercial property lends itself to a residential redo, “Some commercial spaces are incredibly desirable for residential, including ground-level space with parking, or even two-story walk up buildings,” said Weislow. “We also anticipate the residential footprint to be smaller in order to fit more people, and we’re actively working with clients to help design buildings that allow for more convertible spaces.”
Vacant commercial properties could have potential, predicted Weislow. “In this scenario, landlords are looking to convert properties that were originally intended to be occupied by commercial tenants, which made sense in a different market. The current economy is forcing landlords to pivot and unexpectedly spend dollars toward capital improvements to support a new demand for residential occupancy.”
In Houston, some developers have already begun to turn commercial real estate into residential, along with combining the two to allow for mixed-use.
A former 250,000-square-foot office building in Houston’s Upper Kirby District was transformed into the 11-acre, mixed-use Kirby Grove complex, featuring 270 residential units, by Houston-based developer Midway.
But because Houston has more available land to develop than many cities, it’s unlikely it will become a leader in commercial-to-residential transformations anytime soon.
According to Bill Fulton, director of Rice University’s Kinder Institute for Urban Research, not every office building or mall lends itself to residential conversion. “You might see strip centers just completely go away and get replaced by housing,” he said. “The land will be converted, but the building won’t.”
In the end, it comes down to cost. While the numbers have to work for the developers, the tricky part is convincing lenders that the process is feasible. “It’s persuading lenders this is a better idea than something else,” said Fulton.
For cities that are facing a growing crisis brought on by empty commercial properties, that just might be true.