Industry Perspectives & Opinions: Urban Redevelopment

It’s been over five years since the height of the COVID-19 pandemic, during which the abrupt change to remote work for many spurred a mass exodus from central business districts, and particularly downtown cores. There was an assumption that once things returned to “normal,” the traditional, in-person office culture would also return. However, with the transition to hybrid and remote workstyles, technology advancements and the demand for more flexibility, over 41% of U.S. adults now work remotely at least part-time [2], leaving office buildings under-utilized. Employers, landlords and city officials are now facing the challenges of substantial vacancy gaps in these once fully occupied buildings, further reducing downtown vibrancy.

This is where the hot-button term “urban doom loop” [1] comes into play. Urban doom loop is loosely defined as a situation where “a series of interconnected events… lead to economic declines in commercial real estate and beyond.”

So, we’re taking a look at our own region, the Twin Cities of Minneapolis and St. Paul, Minnesota. What do we do with all of the vacant urban office space?

Brock Martinson, Principal at Pope Design Group, weighs in: “Something that comes up often when people speak about the state of the downtown Twin Cities office market is, ‘we’ve got too much of it by about half right now.’ The conversation is, what do we do with something like one of the larger downtown towers? Can they be reused as residential because we’ve got a shortage of housing while we have an excess of office?”

Defining Urban Doom Loop

As of May 2024, the Twin Cities has been experiencing one of the highest office vacancy rates in the United States at 22.6% according to Moody’s CRE. The national average by the close of Q2 2024 was 20.5% [3]. Local and federal government programs are emerging to combat this alarming trend, signaling an awareness of the problem and a willingness to address it, though the movement hasn’t gained tremendous local traction. On the state level, there is a lot of work that needs to be done to push these ideas across the starting line as no movement was made during the 2024 legislative session, and financing options such as Tax Increment Financing (TIF), are not enough. As a result of this slow progress, local companies are trying to support momentum by demonstrating the feasibility — and ethical responsibility — of making these office-to-residential conversions a reality, though many developers and financiers continue to have doubts.

“There’s often the same statement of, ‘Oh it doesn’t work. You can’t do it because of HVAC, or the restrooms don’t work, the building depth isn’t right.’ The default assumption is that there’s no way to convert [these buildings],” says Martinson.

“And there’s serious conversations occurring around if we can’t get these buildings to be mostly occupied, we’re going to have to start tearing them down. It’s people talking about downtowns of major cities and ripping down the skyline, basically, which would be a real tragedy. So, before it gets to that, let’s find a way to offer up some alternate ideas that can be explored.”

Martinson gives us a scenario using Minneapolis’s IDS Tower, which found temporary relief in December 2023 through a three-year loan extension.

Pioneer-Endicott Redevelopment (Courtesy HBG, Ltd) ©Spacecrafting Photography

“What’s happened since COVID is that now companies are bailing out of downtown and there isn’t a draw to come to the physical office anymore. So now let’s say a high-rise office building is 60% occupied, and then the owner goes to the bank and says, ‘We need to refinance a $750 million loan.’ The bank goes, ‘Well, the building’s only worth $500 million now (or 400 or 300), so if you want to refinance it you’ve got to come up with $350 million cash.’ Then the building owners just send the keys back and go, ‘Well, it’s your problem now.’

And this is what’s happening with a lot of commercial real estate right now. The bank doesn’t want it, and nobody wants to buy it. So, a lot of downtown commercial real estate is getting caught in what’s being called a ‘doom loop’ because the bank holds this asset that’s worth half of what it used to be, and that contributes to city budgets too. Cities are concerned about this because you had a $10 billion tax base, and now that tax base is $6 billion. Well, where do you get your tax money now?

Because of this doom loop, cities and states are very incentivized to figure out a way to get people back into those buildings. Because there’s really not an option where we can keep office buildings 60% occupied and continue to have vibrant cities.”

While the numbers in this example are fictional, the scenario is very real for many office building owners in the Twin Cities, nationally, and internationally.

“There’s often the same statement of, ‘Oh it doesn’t work. You can’t do it because of HVAC; the restrooms don’t work; the building depth isn’t right.’ The default assumption is that there’s no way to convert [these buildings].”

IDS Tower Crystal Court (Courtesy Phillip C. – Yelp)

Finding the Right Conditions

At an approximately 31.5% office vacancy rate [4], St. Paul’s downtown landscape is feeling the effects of this, though there is a silver lining for Minnesota’s capital city. As told to MPR Newsby St. Paul City Council President Rebecca Noecker, the City of St. Paul boasts a larger number of buildings in their downtown with a smaller floor plate, which makes them a better candidate for residential conversion.

Kate Blum-Wise is a Project Manager on Pope Design Group’s Multi-Family Housing studio. In her career, she has managed numerous urban commercial-to-housing conversions, most recently redevelopment of 1222 University in St. Paul. The historic 1923 St. Paul Casket Company building was underutilized and abandoned for decades and is now a high quality, affordable multi-family housing complex called Twelve22.

1222 University Existing Conditions (Courtesy Landscape Research)

“I would say in general; the floor plate is probably the number one challenge to all of these buildings. You want narrower units so you can fit in more of them along the facade because then everybody has access to daylight. But when the footprint of your building plate is much deeper, there’s all that square footage that is not going to have access to daylight. It’s not a very sellable piece of what people are renting. So that’s one challenge, going through the available building stock, and trying to understand which footprint truly best fits housing.”

Navigating the challenges of existing floor plates can help create unique and desirable floor plans for residents, says Bob Faulkner, Senior Project Manager with Frerichs Construction. Faulkner teamed with Blum-Wise on the Twelve22 redevelopment.

“Everyone on the project team will look at these buildings with a slightly different lens. If we combine our knowledge, experience and expertise we’re sure to find ways to transform these spaces that economically make sense,” shared Faulkner.

Twelve22 Redevelopment ©Costar

“Everyone on the project team will look at these buildings with a slightly different lens. If we combine our knowledge, experience and expertise we’re sure to find ways to transform these spaces that economically make sense.”

Revitalizing Downtown Cores: Balancing Costs & Feasibility

The Saint Paul Downtown Alliance set a goal of attracting 20,000 new residents to the downtown area by 2034, a goal if successful could see tremendous economic benefit with more people returning to the downtown core. Gonzalo Villares, a Principal and Chief Operations Officer at Pope Design Group, provides perspective:

“If you do bring residents into downtown, they’re potentially going to be there 24 hours a day whereas with primarily office occupancy, they’re active typically from 9-to-5 then it’s comparably empty outside of special events drawing masses of people to the area. But now if you add in a mix of increased permanent residents – the office component remaining because that’s not going away completely – you may end up with a healthier downtown in the long-run. It may be a good thing for the viability and the livability of downtowns if it succeeds whereas if these structures stay vacant, then there’s the likelihood that they come down.”

When considering existing building conversions, Blum-Wise says: “One of the big conversations that’s happening before you get to a conversion project is the financing. Typically, when a developer is purchasing a project, we (the architect) come into it after they’ve closed on the deal. Other cities are moving to make public dollars available to redevelop vacant office buildings because their vacancy rates are so high within the city.

“Post-COVID, I think there was a lot of hope that offices would thrive again and we’re finding that that’s not really the case. We’ve gone through sort of a shift. We’re not going back. We have to look forward and you can’t really leave these buildings vacant; it does a disservice to the city and the market opportunities. And I think there’s a lot of conversation in all these other cities of, ‘How do we redesign our downtowns?’ It’s more of a microcosm of the city: we need housing, restaurants, shops… livable infrastructure like that.

“We’re looking at 20% vacancy rates in some of these buildings. That’s a pretty significant chunk of downtown – tax money that would be able to have those buildings up and running, and revenue drawing people in – there’s 20% of your downtown that’s not being used anymore.”

Bob Faulkner stressed the importance of involving a contractor early in discussions and concept meetings to get up-front help with pricing and feasibility: “We can share what has worked well on other projects, as well as things that haven’t worked so well before work has even started.”

Together, Blum-Wise and Faulkner managed the design construction process of the Twelve22 Apartments redevelopment.

“On the Twelve22 Apartments, we found a basement space that nobody realized was there, and we had our structural engineer look at it. They were able to do an initial pass and determine that it wasn’t in good shape and encouraged further testing. Granted, that’s an upfront cost that the client might not be willing to pay for because it’s a risk, but it’s all of these upfront costs that the client or the developer has to take on before they can make a return on the investment,” said Blum-Wise.

1222 University Existing Conditions (Courtesy Landscape Research)

Twelve22 Redevelopment ©Costar

“. . . there are going to be a lot of unknowns and a lot of risk associated with it because you can’t uncover everything. So, I think what makes it work is the developer knowing that there are going to be challenges and that you’re going to have to think outside the box.”

Navigating Hurdles: Insulation, Windows, HVAC, Sustainability

For additional hurdles during these building conversions, Blum-Wise offers additional insight based on her direct experience:

“I think that one of the challenges that comes with renovating any building is that there are going to be a lot of unknowns and a lot of risk associated with it because you can’t uncover everything. So, I think what makes it work is the developer knowing that there are going to be challenges and that you’re going to have to think outside the box.

Another challenge is sometimes your building envelope. Commercial buildings are held at a different thermal envelope standard than residential insulation; you have to meet a certain thermal comfort value on the interior. With offices – let’s say you’re converting a glass tower – that curtain wall might not permit a developer to easily divide up all of the demising walls, and in-between units might not cooperate with the patterning on the exterior.

“There are projects that have looked at removing the entire skin and then re-cladding it using pre-manufactured panels that create an insulative wall and operable windows, because a lot of office buildings don’t have operable windows either. So, these two really big factors – insulation and operable windows – impact that selling point alongside ample daylight access and considering how your units lay out across the footprint.

Additionally, mechanical, electrical and plumbing systems can pose many challenges when converting existing buildings for residential use. The typical commercial office systems tend not to have the capacity to serve the needs of a residential building. The residential units need individual temperature control (HVAC units), exhaust, outside air and individual electrical panel. When looking at redevelopment it should be assumed that mechanical, electrical and plumbing systems need to be upgraded to new systems based on age and capacity issues.”

Pioneer-Endicott Redevelopment ©Gilbertson Photography

Minneapolis-based engineering firm Dunham Associates, Inc. highlights additional benefits to this approach. “Repurposing an existing building reduces the need for new construction materials and will minimize waste while retaining the embodied carbon in the structure. However, for the mechanical and electrical systems, it is likely that much will be replaced. There will be some cost savings with the retention of at least some of the infrastructure, which might include the electric service, site lighting, fire pump, fire service, storm drainage, and centralized boilers or chillers. The only distribution to remain will probably be back-of-house systems,” says Randy Olson, Partner and lead of Dunham’s Commercial Business Unit.

Olson expands on this. “In nearly all cases, the mechanical systems serving an office are not appropriate for a housing application. While some of the infrastructure may remain, they all require evaluation as the appropriateness and capacity may not align with the needs of housing. Vastly more plumbing fixtures will be installed, so the entire domestic water and waste system including the utility services will probably need to be up-sized. All of the distribution systems such as fire sprinkler piping, domestic hot and cold water, sanitary waste, ductwork, exhaust systems, HVAC piping, and controls will be new, as the layout and use of the space will be entirely different.

“In nearly all cases, the mechanical systems serving an office are not appropriate for a housing application. While some of the infrastructure may remain, they all require evaluation as the appropriateness and capacity may not align with the needs of housing.”

During this replacement, more modern solutions to all of these systems can be installed to enhance the sustainable aspects of the building. This can include elevated equipment efficiency, the application of more efficient technologies, and more intelligent control systems.

A typical office building is designed with centralized power distribution. To support a multi-family reconfiguration, additional electrical panels are required to provide individual metering for each unit. The reconfiguration will be significant enough where a complete distribution replacement should be expected. Service capacity will need to be evaluated and up-sized in some cases. This is especially true if every apartment has its own electric domestic water heater, electric dryer, and electric range and oven. All new lighting and lighting controls are needed, as is typical for any full building remodel. The fire alarm system will probably need to be replaced since the code requirements for residential use will require greater capacity.”

340 Sibley Lofts Redevelopment ©Oneshot Media

340 Sibley Lofts Redevelopment ©Oneshot Media

Blum-Wise stressed the importance of involving experienced contractors and consultants to explore and understand the limitations and potential of converting a building’s original use to housing.

“Engineering partners often have a good sense of understanding sustainability goals and meeting the client where they’re at in saying, ‘Okay, you want something super sustainable? Here are your options. If you want something middle of the road, here are your best cost options.’ And same for the low-cost options.”

Blum-Wise continues, “When looking at the funding source to complete these types of projects you may have to meet sustainability program requirements. For example, TIF money from a city may have these requirements. Good partners will show up to a project equipped with all of that experience and knowledge, and they’re skilled at having hard conversations regarding what building owners need to do to meet their sustainability standards, if they’re required to have them.

Your designer could add value on from day one by helping look at the building, bring in their engineering partners to do a high-level gut check and help determine feasibility. Like, ‘Is this worth it? What are those unknowns that we need to work to uncover?’ So, there’s kind of a gutting of the building that has to be done, and sometimes there might be structural issues or roof and weatherproofing issues that you might not know about.

Overall, I’d say any site issues, the building shape, the footprint, whether or not it’s conducive for housing, the envelope – those are some of the challenges [in converting a structure].”

Pioneer-Endicott Redevelopment ©Gilbertson Photography

Benefits to Redevelopment

There are a number of other benefits that come from redeveloping an existing structure instead of tearing down to rebuild. Developers have paused on new housing projects due to high interest rates while there continues to be an affordable housing shortage. At the same time, commercial property values have plummeted because of the climbing vacancy rates which affect the ability of cities to maintain their budgets, shifting the tax burden to homeowners. Finding solutions that convert the existing structures to attractive and affordable living could be positive forward movement to bridging the housing needs gap and returning populations to the downtown area where property values and revenue may be positively impacted.

“It’s usually less expensive [to convert] than construct a brand-new building, and it often requires less time to go through the city entitlement process because it’s a renovation – the building already exists,” says Blum-Wise.

Hamm’s Brewery Complex Redevelopment © Pope Design Group

“However, if it’s not zoned for housing, that may be a challenge as many developers don’t like pursuing variances because there’s no guarantee to get it. But with these vacancies and potential financial incentive from the cities, it could help lower that risk.

Alongside the lower [development] cost, you also have speed to market. You start construction and you’re going to get to a complete project in a faster timeframe than you are going to have with new construction.”

Faulkner agrees; new construction offers its own challenges and unknowns. These include weather delays, contaminated soils, bedrock unsuitable soils and ground water conditions.

“With redevelopment project, you start at day one of construction with a ‘dried building’. This way there are more trades that can begin their work sooner, often allowing for faster schedules and turn-over,” said Faulkner.

Commission House (Courtesy Ackerberg)

“It’s usually less expensive [to convert] than construct a brand-new building, and it often requires less time to go through the city entitlement process because it’s a renovation – the building already exists.”

There are also substantial sustainability and labor benefits to a redevelopment over new construction.

“Seventy-five percent of the cost of a conversion goes to labor and only 25 percent material, whereas on new construction, it’s about the opposite,” says Chris Sherman, President of Twin Cities-based developer Sherman Associates in an interview with MPR News. “So, for both sustainability and job creation, conversions are highly impactful.”

Regarding sustainability and consideration of redevelopment design that attracts prospective residents, Blum-Wise contributes: “There are existing buildings like the Duffy Apartments in Minneapolis that have a central core naturally existing in the building. There are precedents for not just leaving the building intact as it is but opening up holes into it so that you can have better access to daylight.

“There’s also the option in these structures to put better building amenity spaces on the rooftops because the square footage is already there, but there are a lot of amenity spaces that can exist at the first floor too. So, if we’re not relocating an elevator and residents have a longer walk from the front door to reach the core, there’s an opportunity for creating more amenity space within that stretch that probably couldn’t be penciled in with new construction because efficiency is already under the microscope. ‘How much rentable square footage do you have in the overall building?’ Well, if the building’s already there, there’s a great opportunity to add in amenities that can actually draw people in to renting that space too.

“Usually with a high-rise, you’re looking at non-combustible construction which is one of the biggest benefits to converting those buildings – you can do a lot of higher-density amenity spaces and you’re not paying that upfront cost to build a new structure, which I think is one of the biggest benefits. And everybody a couple floors up are going to have amazing views, which kind of sells itself at some point.”

Pioneer-Endicott Redevelopment ©Gilbertson Photography

Exploring Building Conversion Feasibility

Luckily for the current downtown landscapes and building owners, tools and programs are now available that allow designers and developers to determine the viability of existing structures for conversion. One such program is Giraffe Technology.

“Giraffe is what you’d use one step before site feasibility analyses and test fits, which allows designers to do a lot of analysis of the existing site, infrastructure and zoning. You can even rough out what a high-rise would look like on this site. ‘Of the existing buildings that are there, what is the makeup? What’s the square footage? What’s the footprint?’ We have the ability to do a very quick study up front,” says Blum-Wise.

“As teams review what real estate stock is available downtown, it could be worthwhile to look at the footprints of the available buildings, and say, ‘These are the ones we’ve earmarked as being a good potential [redevelopment] site. What could that mean for the building?’ It’s a great way for developer and design teams to be proactive and get ahead of what’s available and what the hurdles are of each prospective project.”

Pioneer-Endicott Redevelopment (Courtesy HBG, Ltd) ©Spacecrafting Photography

Pioneer-Endicott Redevelopment ©Gilbertson Photography

There is no doubt that the process is challenging, and the unknowns and risks are scary.

Finding ways to reduce the “urban doom loop” by converting vacant office buildings for residential use will help to breathe life into our downtowns, generate tax dollars and fill substantial housing gaps. From our team’s perspective, and experience with recent conversions, it really starts and ends with collaboration. By committing to teamwork from the very first conversation, the developer, engineers, consultants, designer, contractor, and government agencies, can all work together to navigate each project’s challenges to convert underutilized buildings into destination living for our neighbors and communities.

To learn more about some recent urban redevelopment projects, visit popedesign.com.

Hamm’s Brewery Complex Redevelopment © Pope Design Group

Pope Design Group developed this article from the input of our employees and colleagues, including contributions and insights from Dunham Associates, Emanuelson-Podas, and Frerichs Construction, along with the resources listed below.

(1) Arpit Gupta (Professor, NYU Stern School of Business), Vrinda Mittal (Professor, UNC at Chapel Hill – Kenan-Flagler Business School) and Stijn Van Nieuwerburgh (Professor, Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER).

(2) Mehdi Punjwani & Sierra Campbell. (03 April 2024) “Remote work statistics and trends in 2024” USA Today, https://www.usatoday.com/money/blueprint/business/hr-payroll/remote-work-statistics

(3) Smith, David. “Marketbeat: U.S. National Office Q2 2024.” Cushman & Wakefield, https://www.cushmanwakefield.com/en/united-states/insights/us-marketbeats/us-office-marketbeat-reports

(4) Ward, Hannah. (02 July 2024) “How Empty Is Downtown St. Paul? It Depends Who You Ask” TCB Magazine, https://tcbmag.com/how-empty-is-downtown-st-paul-it-depends-who-you-ask

Twelve22 Ribbon Cutting (Courtesy JB Vang Partners)