Turning empty Michigan offices into housing is trickier than it seems

It seems like the perfect solution.

Too much office space. Not enough housing. Let’s turn cubicles into apartments. These conversions have gained attention in recent years as remote work emptied out offices and housing shortages worsened during the pandemic.

Two Michigan cities – Grand Rapids and Detroit – are ranked among the highest in the country for future conversions of unused space. And the White House launched an initiative last month to boost turning commercial space into housing.

“If only a small percentage of underutilized commercial buildings were converted to housing, it could create thousands of units of much-needed housing,” the White House said in the guidebook.

But it’s not as simple as it seems.

“The moral of the story is it’s not easy,” said Tom Ralston, owner of Grand Rapids-based Union Suites Development.

Urban Suites started construction in late October on a $31.8 million office-to-housing project on an old AT&T building constructed in the 1960s. Nonprofit housing developer Dwelling Place is partnering on the project.

The office is almost a bunker: brick exterior, steel beams, concrete floors. But by the end of next year, the formerly vacant space will be transformed into 150 income-restricted apartments and townhomes for seniors.

“When converting office space to apartments, there are several challenges that the architect must overcome because it’s an adaptive reuse,” Ralston said. “The building was never meant for housing.”

Redesigning is the biggest issue.

Office buildings with open spaces for desks or cubicles often end up with a donut in the middle where there are no windows. Thick structural columns can be tricky to build around. And developers need to add bathrooms, kitchens, hallways, closets and living areas to each unit.

“You’re going to have geometry of a building that’s not ideal for housing and lends itself to inefficient use of spaces,” Ralston said. “You’re going to have apartments that are oddly shaped.”

But these atypical apartments could be a solution to a crisis.

To meet demand, Michigan needs to add an estimated 75,000 housing units by 2027. In Grand Rapids, the five-year housing gap grew by roughly 59% during the pandemic from 8,888 needed units to 14,106, and local leaders across the state are increasingly raising alarms about a lack of housing.

Eliminating “red tape” by loosening some zoning rules will smooth the process, said Bill Bubniak, executive vice president of Southfield-based commercial real estate firm Farbman Group and director of the Weiser Center of Real Estate at the University of Michigan.

“If everybody bends a little bit and works together, we might not end up with the perfect buildings. But we’re going to help solve a crisis that’s existed forever,” he said.

Related: Warehouses, hotels, offices: Empty buildings become housing in Michigan

Nationwide developers created 10,000 apartments from former offices, hotels, factories and health care buildings last year, according to RentCafe. Adaptive reuse of offices accounted for over a third of conversions – the largest chunk – even as a post-pandemic momentum of these project has started to slow.

Nearly 7,000 offices were turned into housing in 2020 compared to nearly 3,400 last year.

These redevelopments are happening as close to 20% of office spaces are empty across the country. It’s been more than three years since the pandemic pushed more than half of American workers to remote work, according to Pew Research. Now, about a third are still working from home all the time – 6% higher than before 2020.

Related: Building vacancies take toll on downtown Ann Arbor restaurants, retail stores

This shift has squeezed the commercial real estate market.

An estimated $626 billion of commercial real estate debt maturing in the next two years is “potentially troubled” as offices with loans “underwater” account for a big portion of the debt, according to commercial real estate firm Newmark Group. Commercial real estate prices could fall by 40% in coming years “rivaling the decline during the 2008 financial crisis,” Morgan Stanley estimates.

“We came out of the pandemic, and we had a hotel issue because nobody was traveling for business or leisure. But that got solved,” Bubniak said. “We don’t see the exit out of this office problem. And we’re just at the beginning of the cycle.”

Farbman Group has developed older offices into housing with projects like Woodward Lofts and Riverplace Lofts.

Todd Szymczak, executive vice president, says freeing up government incentives can help “lubricate…