From desks to beds: Landlords convert offices into apartments
Published 8:42 pm, Wednesday, August 28, 2013
Some Stamford office building owners have taken drastic action to fill their buildings -- not with workers toiling busily at their desks -- but with people snacking in front of their television sets or preparing a savory supper.
Realizing that he had little hope of filling some of his office buildings amid high vacancy rates at many area complexes, Gregory Lodato, president of MarLo Associates, converted an office building at 485 Summer St. into a 20-unit apartment building in late 2012, and now he is planning to convert 460 Summer St. into 21 to 24 units.
The difficult office market in Stamford, coupled with demand for apartments convinced Lodato that the timing was right to convert the properties, he said, adding that only six units at 485 Summer St. are unoccupied.
"It was pretty much Class `D' office space. We took this undesirable office space (at 485 Summer St.) and turned it into very desirable apartment units," he said, adding that he has no regrets about his decision, despite the conversion cost. "It will cost north of $100,000 per unit to build (460 Summer St.) We'll be looking for $2,200 for a one bedroom and $2,500 for a two bedroom."
Lodato decided to convert the buildings as the vacancy rate for Class `A' office space in Stamford's Central Business District continues to languish in the mid-20 percent range.
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It is hovering around 26.4 percent, according to a second quarter report issued by Jones Lang LaSalle, while the vacancy rate for Class `B' space is about 13.7 percent.
Rental rates for Class `A' space in the district is $46.60 per square foot, and $25.69 for Class `B' space, Jones Lang LaSalle reported.
`A trend out of necessity'
But vacancy levels are higher farther from the Stamford Transportation Center.
While the long walk from the train station might have deterred companies from locating operations in Lodato's office buildings, he thinks they are in a prime location for tenants that want to be close to downtown retailers and the restaurant scene on Bedford Street.
Lending institutions are anxious to finance apartment construction, Lodato said.
"You go to residential because you can get financing," he said. "I think it's a trend out of necessity. There's no sign of recovery in the office market."
Lodato is not the only office building owner who has seen apartments as a logical option to the futility of working to fill under-performing properties.
"We've done three in Stamford and one in Darien," Freedman said, noting that the first conversion was in 2009 when he turned a 32,000-square-foot Stamford office building at 111 Prospect St. into 55 apartments.
Another project came a year later, when he converted a 37,000-square-foot office building at 25 Third St. into 50 apartments. That was followed in 2011 by conversion of a 20,000-square-foot space at 397 Post Road in Darien into a 35-unit complex, and last year by turning 800 Summer St., a 40,000-square-foot office building, into 89 apartments.
All of the buildings were in Garden Homes' portfolio.
"They all were Class `B' buildings, and the occupancy was not great. The only way we could have them occupied was to keep rent so low that we couldn't make any money. Now as apartments they're 95 or 96 percent occupied," Freedman said, estimating that the conversion costs equated to $140 per square foot. "It's definitely a trend. I don't think it's going to end anytime soon. People aren't using offices like they used to."
Many of the apartments in Garden Homes' converted buildings are studios, starting at about $1,100 a month.
The opportunity to convert an under-utilized commercial building in need of improvement into apartments is hard to resist, said Russell Munz, co-owner and president of Pyramid Real Estate Group, a Stamford-based commercial real estate firm.
"Rent for Class `B' and `C' offices have not moved since the mid-'80s," he said. "In real estate lingo, it's called `creative re-use'. I think it's a great use. There's no shortage of people that want to rent because their credit may not be good, they're unable to qualify for a mortgage or they don't want to own."
Recognizing the demand for apartments in lower Fairfield County, Garden Homes expects to soon raze a vacant building at 1032 Hope St. in Stamford and start construction of an 88-unit apartment building in November. Most of the units will be studio and one-bedroom apartments.
Fairfield, Milford construction
Freedman said he expects construction to take a year, adding that his company is also building a 54-unit complex in Fairfield and a 36-unit building in Milford.
"I think this is the golden age now for rental housing," he said.
Norman Cole, Stamford city planner, welcomes building owners' efforts to convert some of their office buildings because the occupancy levels of them are so low. Some are in the 20-to 30-percent range or lower.
"They're re-purposing these buildings and putting them good use," he said. "They're in nice locations where people can walk (to stores and restaurants)."
In Bridgeport, where residential rents are not as a high, the trend has been slower to catch on. Bradley Balletto, regional manager of Northeast Private Client Group, cited a few examples of converted spaces, like the old headquarters of the City Trust Bank or a former office building at 333 State Street in downtown Bridgeport, which is being leased as high-end apartment space this summer. But, the conversion value is not as great, Balletto said.
Less of a trend
"I don't know that it's going to be as common in Bridgeport because you don't get as high a rent as in Stamford to justify the cost," Balletto said. "I don't know if there's enough product for it or enough demand quite yet."
Toll Brothers have started construction to build out the "Reserve," a residential development with 1,500 units on about 500 acres of land once owned by Union Carbide in Danbury, though this is the only such development in the area, said Jeff Ryer, principal of Ryer Associates. In Stamford, where a strong office culture developed downtown starting in the 1980s, there is a need to bring residential housing back into the bustling hub of the city, Ryer said.
"I'm not seeing that type of scenario here (in Danbury)," Ryer said.
Location was the prime reason why Salvatore purchased a vacant office building at 1200 Bedford St. constructed in the early 1980s, for $1 million and spent $3 million upgrading its facade and converting it into 16 apartments in 2012.
"They rented very quickly. It took 45 days," Salvatore said, adding that the rental rates ranged between $2,300 and $2,500 per month.
The Bedford Street project followed conversion of an office building at 100 Prospect St. into 82 units in 2010, Salvatore said.
Glut of space
"You have a lot of `B' and `C' office space that's beyond useful life, and you have a glut of Class `A' space," he said, commenting that prices for Class `A' space make it hard for offices with fewer amenities to compete for tenants. "These office buildings are in a good area, so it makes perfect sense to convert them. I definitely think you'll see more because I don't think you'll see anything change. There's still so much Class `A' space available."
RMS expects to complete construction of The Moderne, a 58-unit apartment complex at 163 Franklin St. by Sept. 1.
Unlike the conversions, The Moderne is a ground-up project. Twenty-five units already have been leased.
"Stamford is becoming a destination place for people to live," Salvatore said.
Ezra Karp, a broker with William Raveis Real Estate in Stamford, has experienced the demand for apartments in the city.
"It's very strong in Stamford. They come and go very quickly -- that's the high-end apartments. Young people who commute from New York can't afford to buy a house," he said. "Stamford is growing so much. I believe there will always be a need for rental space. If (a conversion) is upscale, it should do well."
Staff writer Olivia Just contributed to this report. firstname.lastname@example.org