Nearly 120 years ago, the Great Baltimore Fire ripped through downtown, razing almost all the structures. City leaders were forced to re-imagine and rebuild a more resilient downtown.
Today’s leaders face a similar existential question. There are no smoldering remains or piles of ash. All the buildings and towers still stand, but many are empty, partially vacant or at risk of losing tenants.
The coronavirus pandemic and its aftermath changed the way Americans work, commute and use traditional workplaces. Experts say office space across the country — especially in older buildings with fewer amenities — is increasingly at risk of becoming obsolete and unneeded.
A report by real estate firm Cushman & Wakefield estimates that by the decade’s end, the amount of obsolete office space nationwide will grow to more than a billion square feet. Office space in downtown Baltimore already has a 20% vacancy rate and landlords there face competition from newer office space elsewhere in the city.
The numbers might sound scary, said Abby Corbett, a co-author of the report, but these older office buildings offer opportunities for downtowns to reinvent themselves.
“It’s not the death of the downtown or the death of the city by any means,” Corbett said. “But we’ve kind of come up against a precipice.”
One of the solutions suggested by Corbett’s report and other experts is something Baltimore has done for decades: converting office buildings to residential towers. Downtown was once almost exclusively business, hospitality and retail space, but has become increasingly residential.
This rebirth hit a post-pandemic speed bump last year, according to the Downtown Partnership of Baltimore. It released a report earlier this month that said the population fell from nearly 42,500 to just above 39,000. Apartment occupancy rates dropped from about 95% to 91% as fewer people needed to live near their employers’ offices, given the rise in hybrid work.
Still, some developers see homes as a much safer bet than offices.
“Does anybody think that office use — the way we use offices — will go back to where it was 15 years ago?” said Patrick Grace, a developer and the owner of Fulton-based Trademark Investments. “There’s much more need for affordable housing, for people to live somewhere, and so the market’s shifting.”
Grace made the remark as he walked through the first floor of the Fidelity Building downtown, one of the few buildings that survived the fire in 1904. Stepping into the 16-story Charles Street building is like stepping into a time machine. Ornate moldings and ceiling coffers, a grand staircase and a vaulted ceiling draw the eyes upward.
“Baltimore is one of the few major cities that we can find this building downtown that’s vacant,” Grace said. “Very, very rare in other cities.”
Orioles owner Peter Angelos bought the building near his law firm in 1999 for $3 million when its occupancy rate was 83%. A planned $14 million office-to-residential conversion never took place and the building emptied out.
These types of conversions are the bread and butter of Trademark, which bought the 175,000-square-foot building last year for $6 million and is spending $47 million to renovate it. Lead remediation is complete and Grace said he expects 231 apartments in the heart of downtown to come online next year, with one-bedroom units renting for less than $1,500 a month.
“As long as the projects are feasible and we can find renters and things like that, we’ll keep doing them,” he said.
Trademark is one of several firms converting underused office buildings in Baltimore to residential space in recent years. Between 2020 and 2021, Baltimore added 395 apartments through office space conversions, according to the real estate data firm Yardi, and conversions nationally hit an all-time high during the pandemic.
That might seem promising, but Cushman & Wakefield‘s Richard Jantz said these numbers are a drop in the bucket compared with the total amount of office space nationally.
Last year, just 42 commercial office buildings nationally were converted to residential buildings, a “disappointing number,” Jantz said.
“It just hasn’t taken off to the point where I would’ve expected it to,” he said. “I’m not sure if that would even qualify as a trend.”
Developers and brokers said there are plenty of office buildings in downtown Baltimore that could be converted, but these projects aren’t easy.
Some office floors host “cubicle farms” in massive open spaces and have centralized heating and cooling systems. Every hypothetical apartment or condo needs windows, plumbing, temperature controls and more.
These can be expensive, and carving out individual rooms with access to sunlight can be impossible in some cases. Some experts said it might make more sense to demolish a tower and rebuild, rather than attempt a conversion.
What makes the conversion of the Fidelity Building feasible is a $5 million Historic Revitalization Tax Credit from the state of Maryland — the largest historic tax credit awarded by the state this year.
“These historic tax credit programs, both at the state and federal level, are fantastic tools to be used to make some of these projects possible,” said Patrick Lundberg, principal at Urban Design Group, a Baltimore architectural firm.
Lundberg’s firm specializes in residential conversion projects and is the architect for the Fidelity Building conversion. The “almond-shaped” building makes the conversion more challenging, he said, and since the building only has one continuous staircase, a second staircase will need to be constructed to meet the fire code.
Architects typically believe they can solve every design challenge, Lundberg said, but some buildings just can’t be converted.
“The costs can be very high and the market needs to be there for the residential side of things, as well,” he said. “It’s not as simple as flipping a switch and you go from office to residential.”
Towers constructed around World War II or earlier are often the best candidates, rather than the larger buildings from later decades, experts said.
“If you get into those big cubes, that’s a challenge,” said Jeffrey Havsy of Moody’s Analytics.
Havsy co-wrote a report last year that said conversions aren’t that profitable. The report looked at property values, conversion costs, and potential rental rates of more than 1,000 buildings in New York City and found that just 3% would be viable conversions to apartment buildings.
Without government help — meaning specific incentives — there probably won’t be a big wave of conversions, Havsy said.
“Every city is trying,” he said. “It has to be a public-private partnership. The math alone just to get the building to work is a challenge.”
That’s what happened in Baltimore about 15 years ago, when the investment firm Legg Mason Inc. announced that it was moving its headquarters from Light Street to a new 24-story tower in Harbor East, sending shock waves through the commercial real estate community.
“Tenants are like lemmings,” said Terri Harrington, a commercial real estate broker. “They saw Legg Mason, and they went, ‘Oh, we’re going to go.’”
Harrington described the migration that followed as a “flight to quality,” with more tenants along the Pratt Street corridor moving to new buildings in Harbor East and elsewhere. Tenants in older, less desirable buildings in downtown backfilled the newly vacant space, leaving vacant older office space north of Pratt Street.
Baltimore responded with a wave of residential conversions, aided by tax incentives and championed by the Downtown Partnership. In a 2011 report, the booster organization identified 10 buildings ripe for conversion — eight of which have been or are being converted to residential. In 2013, the City Council created the high-performance market-rate rental tax credit, which subsidizes the creation and conversion of new apartments.
“We stuck our finger in the hole in the dam at that point. … Now, we have the next flight to quality,” said Harrington, citing the Harbor Point development in Fells Point and Baltimore Peninsula, a development in the South Baltimore neighborhood of Port Covington. “There aren’t a lot of deck chairs to move around anymore.”
Several state agencies are moving to downtown Baltimore from the aging State Center complex in Mid-Town, which Harrington said will be a shot in the arm for landlords, as well as stores and restaurants that rely on daytime workers.
However, the incoming wave of state employees will be offset by T. Rowe Price Group Inc.’s planned move of the Fortune 500 company’s headquarters to a building under construction in Harbor Point, said Owen Rouse, a vice president at MacKenzie Commercial Real Estate Services.
“I have some dramatic concerns about what will happen on Pratt Street,” Rouse said. “Who will backfill 400,000 square feet? … That’s a big hole.”
There still will be demand for office space in Baltimore and other cities, said Luis Quintero, an economist at the Johns Hopkins University’s Carey Business School. But many firms need only half the space they once did.
Hybrid work and work-from-home jobs might seem dire for downtowns, Quintero said, but there’s reason to be optimistic.
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“Before, you had to lure firms to lure workers,” he said. “And now for good or bad, they can at least be partially separated.”
Baltimore probably can’t persuade Google to move here, Quintero said, for instance. But the city probably could entice some of its employees to live here. He recommended that downtown pivot to a mixed-used area, a combination of office, retail and residential space that is walkable.
That recommendation is in lockstep with what city and business leaders said March 14 at the annual State of Downtown breakfast held by the Downtown Partnership.
“We can transform our city’s core into a thriving center for commerce, residential growth and tourism,” said Democratic Mayor Brandon Scott.
This mixed-used approach is what Chasen Cos. is trying to do with another historic office building, 1 Calvert Plaza, a few blocks from the Fidelity Building. Chief Operating Officer Drew Peace said the firm plans to convert the building to about 165 apartments with ground-level retail and office space on the second floor.
The building is well situated for hospital workers and commuters to Washington, D.C., Peace said. He pointed to the recent renovation of CFG Bank Arena and the expected revitalization of Harborplace in the Inner Harbor as more reasons for people to live downtown. He expects the renovated building to open in 2024.
“What’s going on with these future amenities, we’re just trying to get ahead of it,” Peace said.