Building owners, experts, economic boosters say Denver will need to offer incentives to if wants more offices turned into housing

Denver officials want to better understand what it would take to turn obsolete office buildings downtown into sorely needed housing and plan to approach property owners next year about tackling those conversions.

At the direction of Mayor Michael Hancock’s office, the city planning department plans to hire a consultant next year to study 10 or 15 foundering downtown office buildings and the potential to be transformed into apartments or condos, officials said.

“Results would then help guide conversations, led by city staff, with property owners and developers to encourage and support residential conversions, and provide more space for more people to make downtown their home,” Denver Community Planning and Development spokeswoman Alexandra Foster said.

Denver is not the only city reconsidering what to do with downtown areas glutted with suddenly less desirable office space in the wake of the COVID-19 pandemic. In New York City, an Adaptive Reuse Task Force has been convened and is expected to recommend changes to regulations that could clear the way for more office conversions by the end of the year, Axios reported.

The Downtown Denver Partnership, the area’s lead economic development organization, pinned the population in the downtown area at just north of 7,500 people in 2000. As of this year, there are more than 33,000 living in the same core neighborhoods, according to the partnership’s 2022 State of Downtown Denver report.

Transforming the city’s urban core from primarily a 9-to-5 business hub and tourist destination into a full-fledged neighborhood only got more urgent when the COVID-19 pandemic upended office jobs in Denver and in cities across the country.

As of June of this year, daily employee foot traffic downtown was still roughly half of what it was in June 2019, the State of Downtown Denver report shows. Vacancy rates in lower-quality Class B and Class C office buildings downtown sat at 30.2% and 33.7% respectively at the end of June, according to real estate services and investment firm CBRE.

The partnership has been in talks with the city’s planning department about the office building conversion study, president and CEO Kourtny Garrett said.

“Adaptive reuse is a very significant priority for us as an organization,” Garrett said. “The benefits are far and wide from an environmental standpoint, ensuring we’re not just tearing buildings down but reusing them. We can develop a complete neighborhood in traditionally one-dimensional places like Upper Downtown.”

(Upper Downtown is the southeastern part of the city’s core official named the Center Business District.)

Garrett is keeping an eye on the Revitalizing Downtowns Act, a bill introduced in the U.S. Senate last summer that would create a tax credit to cover 20% of qualified office building conversion costs. She is hopeful the city will also take steps to help close the financial gaps those projects often face and not just focus on making the development process smoother.

There are some tools cities can employ to support adaptive reuse, said Tracy Hadden Loh, a fellow with the Brooking Institution. Loh specializes in researching place-making and commercial real estate and has recently been looking into commercial building conversions.

Methods Loh suggested include offering property tax breaks over a fixed period of time, either fully or on the new, higher value of a building once it is upgraded and more valuable than just vacant office space.

“That makes sense as long as whatever use is going into the building is not expensive in terms of the public services it requires,” Loh said. “If it’s a residential building full of kids that might go to school and people who might call 911 then the tax abatement does come as a cost.”

Cities can offer historic preservation tax credits to offer bigger savings to property owners in key neighborhoods or even create micro, place-based tax credits within a city itself, like a community-level version of the federal opportunity zone program, Loh said.

Conversions have a reputation for being more expensive than ground-up construction. That’s not necessarily true, Loh’s said. But the work is a specialty that might be less prevalent in younger cities like Denver compared to, say, Philadelphia. She suggested an opportunity showcase highlighting specific buildings as an idea that could attract redevelopment talent to a market hungry for it.

Another tool cities like Denver could turn to is punishing property owners sitting on buildings that are empty and deteriorating. Instead of figuring property taxes based on the income a commercial property is generating, cities could divorce the value of a building from the value of the land it sits on and tax the owner based on the latter.

“If they’re looking at the location and the value of the location, it is not just stable it is probably increasing. Denver is amazing,” Loh said. “In real estate, everything begins and ends with site control, and it is only fair to hold people accountable for what they have some control over.”

It’s a drop of a drop in the bucket for the city’s record-setting budget for 2023, but Hancock highlighted earlier this month that the city plans to spend $75,000 on the adaptive reuse study. The money would come from a pot of federal COVID-19 relief dollars, not the city general fund.

“The vibrancy of downtown Denver plays a unique role in our city’s economic and cultural health,” Hancock wrote in his Sept. 14 budget letter to the city council. The council’s 2023 budget hearings started last week.

In some cases, conversion discussions have already begun with some forward-thinking property owners.

Tim Borst has co-owned the 14-story building at the southwest corner of Broadway and the 16th Street Mall, known as the Petroleum Building, for 17 years. As first reported in BusinessDen, an architect working on behalf of the building ownership submitted a conceptual level plan to the city late last year that reimagined the office building with ground-floor retail as a residential structure with more than 125 apartments or condos in it. A handful of other concept-level conversion plans were submitted for downtown buildings over the summer, BusinessDen reported.

“We’re in the very early explorative phases of this just to gauge the feasibility of these conversions,” Borst said, emphasizing that a concept plan is no guarantee anything will change on the corner of 16th and Broadway.

The biggest hurdle, of course, is money. Construction costs and interest rates would come to bear on any project, Borst said, but conversions are unique and require special work that ground-up construction does not.

Borst pointed to Calgary, Alberta as a place he knows is committing big dollars toward supporting conversions. The city was offering $75 per square foot up to a maximum of $10 million per property to downtown office building owners looking to make the switch, according to a 2021 story from the Calgary Herald. Denver is not on the same level.

“(Denver) does not have any financial incentives in place to actually push this forward,” Borst said. “That may well happen in Denver and those of us considering this on the early end may not achieve that, but, over time, I hope that the city will continue to encourage these projects.”

Source: Read Full Article