For much of its history, Santander Tower in the center of Dallas was filled with bustling office workers.
But more recently, as tenants pulled back on space and WeWork announced its departure from the prominent location, a different sort of worker has been crowding into the elevators winging their way to the 34th floor.
A group of hardhats is busy converting WeWork's former space for residential use, trying to stay out of the way of business people who still call the 50-story Santander Tower their office. The 1.4 million-square-foot skyscraper's owner, Pacific Elm Properties, is converting 14 floors of vacant office space to luxury apartments.
"If there's been a hurdle in doing this, it's converting floors from office to residential while you are actively managing a Class A office building," Jonas Woods, who formed Pacific Elm Properties under Woods Capital to focus on urban projects in Dallas and Raleigh, North Carolina, told CoStar News.
Office-to-residential conversions have been picking up speed in big cities around the nation as property owners grapple with vacant office space as tenants have been leasing smaller footprints since the pandemic's start. But developers of such projects face a bevy of issues such as the viability of a conversion.
Woods is paying for the conversion at Santander Tower with 100% equity. He has fielded calls from curious real estate investors around the country wanting to know the financial details behind the conversion process and whether it is a profitable venture. After all, Woods is one of the investors leading the charge, taking on the risks and challenges of being at the forefront and learning the lessons that come for those who are among the first.
"We're educating a whole investor base," Woods told CoStar News.
With Dallas being relatively easy to develop, compared with other parts of the United States, Woods said circumstances pushed him to become an investor and test the waters on converting vacated office space to residential — a move he expects other investors behind downtown Dallas' skyline also to make.
Conversion Concerns
Pacific Elm Properties is betting that adding more uses to its real estate will give the properties a boost of vibrancy when used around the clock, even if it means less space to lease. Woods estimated there's a toll: a loss of about 30% of the real estate he's able to lease after a conversion, with the big rectangular floors of an office building often swamping the needs of what would be designed specifically for an apartment building.
For example, Woods and his team are actively designing a full-building office-to-residential conversion at Bryan Tower in downtown Dallas, potentially decreasing the 1.1 million-square-foot office building to an 850,000-square-foot apartment tower.
About 35% of the office space within Dallas' central business district was built in the 1980s, CoStar's market analytics team said, leading to some of the city's development marvels such as Trammell Crow Center, Comerica Bank Tower and Bank of America Tower. The savings and loan crisis stalled development for a time, but North Texas developers added another 100 million square feet of office space to the region between 2000 and 2019.
"This skyline has been made up of purely office buildings, but, in the future, I think we'll see half of it being office and half of it being residential," Woods said. "This is unique to Dallas. We are a speculative development market, and while other U.S. markets are doing the waiting game, we are being more forward-thinking."
With the national office vacancy rate on par with what is observed in the Dallas-Fort Worth region, Woods said he sees office-to-residential conversion projects as a national opportunity for investors.
"We are seeing the highest vacancy rate in history across the country," he said. "This presents an opportunity to help redefine downtown as a much more mixed-use neighborhood. You'll see more residents and an environment creating virtuous circles that support all other uses, with more amenities in the neighborhood driving higher demand for office space."
New York's meatpacking district is a prime example of how gentrification in cities can play out, with it now one of the city's hottest neighborhoods, Woods said. This can happen in downtown Dallas too, he added.
"Downtown Dallas is certainly behind other neighborhoods, like Uptown, but there's plenty of headwinds to improve it right now," Woods said. "The notion of a central business district doesn't work anymore; it has to be a mixture of uses in a neighborhood with all the amenities."
WeWork Exit
The construction workers at Santander Tower have begun building residences within what was once WeWork's former southern regional hub on the 34th floor.
About seven of the 14 floors slated for conversion throughout the tower already have been transformed into what is now known as Peridot, with about 55% of completed units leased. The Peridot is expected to be completed by the end of August, making way for other planned office-to-residential conversions in Dallas-based Pacific Elm Properties' portfolio, which comprises 6.5 million square feet.
WeWork's 82,000-square-foot office at the tower that opened in mid-2017 was expected to house 1,600 workers. WeWork vacated the space in 2022, and the shared office provider's telephone booths and glass offices have been ripped out to make room for the high-end finishes of luxury apartments.
WeWork's departure from Santander Tower was followed by the company filing for Chapter 11 bankruptcy. The New York-based coworking company plans to emerge from bankruptcy protection with about 175 leases in the United States and Canada.
WeWork has exited several of its leases in the Dallas-Fort Worth region, the nation's fourth-largest metropolitan area, including some of its Common Desk leases in Deep Ellum and Oak Lawn. WeWork acquired Dallas-based Common Desk prior to filing for bankruptcy protection. Most of Common Desk's locations aren't leased but managed as part of a third-party management agreement with the landlord.
WeWork's decision to exit leases through the bankruptcy process has offered other tenants a place to expand. Through February, at least 90 different firms moved into or signed leases for about 3 million square feet exited by WeWork, according to CoStar data. In all, WeWork has exited nearly 9 million square feet through that period.
Some of WeWork’s former offices have been claimed by other coworking giants, including IWG-Regus and Industrious. Completely redeveloping WeWork's former spaces is rare since costs have risen due to inflation and interest rates, Sandy Romero, research manager for Cushman & Wakefield, said in an interview with CoStar News.
Some landlords are opting to create spec suites for potential tenants at former WeWork locations amid continued demand for agile and flexible office space, Romero said.
“This part of the office sector is really healthy, and we’ve seen an increase of providers taking up space,” Romero said.
New Horizon
Upon completion of the office-to-residential conversion project at Santander Tower this year, Woods said he has other projects up his sleeve if the capital markets — and the financing needed for a new project — return to the table. Unlike Santander Tower, financed by Woods Capital with 100% equity, Woods said he'll need lenders to back the firm's next project.
Pacific Elm Properties is in the design phase of the office-to-residential conversion of Bryan Tower within blocks of Santander Tower, creating what could be upward of 500 apartments in two separate residential offerings.
At one time, the real estate firm planned on converting about half the office tower to residential units, but those plans have changed with a full conversion expected to begin as early as next year if historic tax credits and capital markets make the project possible, Woods said.
"Lenders today struggle to provide a loan on any component of office, even if it's a conversion play and reasonably underwritten," Woods told CoStar News. "Capital markets have been the standpoint challenge relative to all the other complicated, hard things that go into a conversion.
"Take [Bank of America Tower at] Parkside, which would've happened earlier and without us if the capital markets weren't so challenging," he added. "That project has Bank of America as a credit tenant taking half the building in the best location in Dallas, and we were barely able to finance it. We came to the table with our lender, and without both, it wasn't going to happen."
The shift in how companies use their office space is setting a new normal for how much office space is needed in certain U.S. metropolitan areas, Woods said, with lenders and investors still seeking to find that answer.
Other developers also are converting downtown Dallas office properties. Shawn Todd is planning to convert Energy Plaza into a mixed-use development with about 300 apartments. Todd previously worked on an office-to-residential conversion at One Dallas Center before the pandemic began.
"There are five or six buildings in downtown Dallas that could seriously execute an office-to-residential conversion, taking about 5 million square feet of office vacancy off the market, benefiting the rest of the market," Woods said. "This presents downtown Dallas to be a very different neighborhood in a few years."