• Real estate giant Hines has announced its first office which will be converted into accommodation.
  • The company has purchased an office in downtown Salt Lake City and plans to turn it into luxury housing.
  • As the office vacancy rate increases while the apartment vacancy rate decreases, more are considering conversion.

Office buildings in the heart of big city skylines are notorious for attracting flashy, well-funded tenants who want to use the properties to sell their prosperity image.

These days, more and more businesses are relocating rather than in, leaving building owners scrambling and desperate for new forms of income. Hines, a private equity giant with more than $90 billion in real estate, says it has the answer, at least for one of Salt Lake City’s most recognizable buildings, the 24-story South Temple Tower.

Hines announced on Thursday that it had purchased the historic building after a wave of tenant departures caused occupancy to drop by a quarter since 2018. The building was attracting businesses from a variety of sectors, including law, engineering and investment banking. The opportunity, Hines says, lies in residential housing, where demand and rents have increased as Salt Lake City’s population has exploded to record highs. In store, you’ll find 255 luxury rentals within walking distance of Temple Square and the city’s business district.

This is Hines’ first time tackling an office-to-residence conversion, which is notoriously difficult, expensive, and time-consuming. In New York, the One Wall Street tower in the center of the Financial District is only now ready for condo sales after nearly eight years of construction, the New York Post reported. But conversions are likely just the tip of an iceberg, with remote working leaving rented offices sparsely populated and vacancies reaching levels not seen in nearly 30 years.

Additionally, apartment rents are repeatedly setting records, attracting investors who predict multi-family properties will provide more stable income than offices and outpace inflation-eroded returns in many other asset classes.

Hines, who owns properties around the world, also acts as a third-party manager for an additional 373 properties, giving him a behind-the-scenes look at how different real estate assets are performing. Dusty Harris, Hines’ senior general manager who worked on the deal, told Insider that skill helped inspire this deal.

“With all the challenges of the pandemic, we had a front-row seat to the challenges that office buildings were facing,” Harris said.

He said the South Temple Tower was only 50% rented, an unsustainable level that stands in stark comparison to the occupancy of the Salt Lake City apartment market, which has its lowest vacancy levels in 20 years, according to a study by the Gardner Policy Institute.

“That brings us to a natural question: what do we do with the office buildings that we own or don’t own that are in trouble? Harris said. “Housing is a natural choice.”

Hines’ project is not without its challenges, the main one being the expense of renovating a 1960s building and converting an office floor plan into apartments. Harris said construction would likely cost more than equivalent new construction.

The company declined to disclose the size of the deal, though the Salt Lake County Assessor’s Office this year appraised the property at just under $56 million.

The challenges of conversion

High construction costs make office-to-residential conversions difficult to sell, even if leasing slows. For example, an office building with only modest rental income might have better returns and lower costs with a renovation, compared to a conversion.

National and local regulations and associated relationships must be managed.

The conversion of One Wall Street, a historic office building that originally housed the Irving Trust, was approved by Mayor Eric Adams of New York and Governor Kathy Hochul of New York, no doubt easing the process. The way is now open for more conversions, with the New York Real Estate Board estimating that 10% of the city’s office portfolio could be turned into housing.

In the case of South Temple Tower, Salt Lake City’s downtown office market underperformed suburban offices in the metro area, Harris said. The state’s many tech employers have largely focused on suburban offices near the campuses of Brigham Young University in Provo, Utah, and the University of Utah in Salt Lake City, a- he declared.

There are office buildings that would not be suitable for conversions, including larger properties, which would make it difficult to provide apartments with enough natural light. The South Temple Tower, Harris said, has a floor plate 40% smaller than the typical office building, a feature that has hurt its rental in the past but makes this conversion easier. It will still be necessary to renovate the exterior wall to add more windows.

Likewise, the property did not have enough parking for office uses but has a good ratio for residential use.

South Temple Tower was previously owned by investment firm Maier Siebel Baber, which bought the property in 2013. The company renovated it in May 2017 before falling into default on a $29.6 million loan later that that year. In 2018, the company refinanced the property with a $41.5 million loan. Trepp’s data at the time showed it was around three-quarters occupied, but many of its leases at the time were due to expire well before 2021.

A CBRE hiring website also showed several vacancies.