Office Conversions Gain Momentum as Other Uses Have Greater Appeal

WASHINGTON, DC—If PRP LLC's plans to convert its newly-acquired office building at 2501 M St., NW into a luxury residential condo sound vaguely familiar that is because the transaction is part of a growing trend in the area. Increasingly, office buildings are being acquired with an eye to being redeveloped into another use, typically apartments or condos but occasionally schools or hotels. There have been 19 such acquisitions in DC and surrounding environs in the last few years, with a few outliers having occurred in 2004 and 2005, according to JLL who tallied up the transactions.

"Developers are acquiring buildings that are functionality obsolete or in functionally obsolete locations to reposition into new uses," JLL Research Director Scott Homa tells GlobeSt.com.

"It makes more sense in many cases to take these assets and go in a completely different direction rather than add new rooftop or take a C office building and upgrade it to B status, for example," he says.

This tactic is hardly new, especially among value add or opportunistic funds. But it is clearly gaining momentum, especially as office leasing remains tepid and tenants are still in control of the market. Since the start of 2010, 13 office properties totaling 1,370,755 square feet have been removed from inventory due to conversion to other uses, according to JLL. It reports that:

• 72% are conversions to apartments

• 15% are conversions to condos

• 13% are conversions to other uses, including a school and hotel

Geographically, 76% of all office conversions are occurring in the suburbs, with just 24% concentrated downtown.

Crystal City has witnessed the most conversion activity thus far, with Vornado's repositioning of 2221 S. Clark St. and LCOR's repositioning of 400 Army-Navy Dr., accounting for 29% of overall activity.

Moving further out into the suburbs, however, developers are less likely to reposition an existing building and more likely to tear it down and start afresh, Jacob Anderson, senior research analyst with JLL tells GlobeSt.com.