City grapples with empty office space Converting buildings to apartments studied, but cost discouraging

THE BALTIMORE SUN

Tucked away on a largely forgotten strip of East Saratoga Street downtown sits an abandoned eight-story office building, its faded alabaster concrete pockmarked by age and many of its darkened windows covered with graying plywood, a casualty of the city's modernization.

Since 1988, 222 E. Saratoga St. has sat empty, after its tenant, the city's Housing and Community Development agency, relocated to a new structure a few blocks away.

The building isn't alone. Nearly one-quarter of all of downtown's Class B office buildings -- structures more than 25 years old that lack amenities such as parking and are unable to adapt to technological advancements -- are currently vacant, a trend few expect will reverse because of a lack of new job creation, computers and other technological advancements.

The available space is enough to fill half a dozen 28-story Legg Mason Towers.

But under a plan announced by Mayor Kurt L. Schmoke late last month, older office buildings downtown such as the one on Saratoga Street may again be inhabited -- by converting them to apartments.

The conversions would solve a number of thorny problems for the mayor, such as reversing the loss of city residents and a diminishing tax base while filling up office buildings that may never again be occupied by business.

Fueling the plan is the fact that some successful conversions have occurred here and elsewhere in such cities as Chicago. But in almost every case, those buildings had previously housed manufacturing operations that were better suited for rehabilitation, and they received lucrative tax breaks that made the economics work -- tax benefits that no longer exist.

"There's an opportunity in front of us and the responsible thing is to look at what's possible," said M. J. "Jay" Brodie, the new president of the Baltimore Development Corp., the city's economic development agency. "It may be after we examine it that we find it doesn't work at all. The point is, we can say we looked at it."

Nor is Baltimore alone in grappling with the problem. Various older cities that expanded rapidly a decade ago during an economic boom now face the same tough questions of what to do with older office buildings.

If the plan fails here, the city's skyline could be altered dramatically. Many real estate analysts view the study and potential conversions as a final, desperate effort to revitalize some of downtown's aging structures -- and architectural treasures -- before demolishing them.

City officials have been reluctant to issue multiple demolition permits downtown, however, to avoid the appearance that the city's economy is in decline.

It's easier to conceal a vacant building than it is a vacant lot, and even an empty structure pays more taxes than an empty lot.

Although no one in the city government will identify potential candidates for conversion at this time, the likely possibilities include a five-story building at 300 N. Charles St. and 222 E. Saratoga St. Various sources, including Mr. Brodie, said the 18-story Munsey Building at 7 N. Calvert St. may also be considered.

In each case, the buildings are vacant or largely vacant.

"We'd be willing to do it, and we've not pursued it thus far #F because of the extreme public subsidy that would be required, and we're aware that there are shortages in that area," said Tom Dowling, president of Dowco Management, the owner of the Saratoga Street building. "We don't see any chance of landing a single, private office user."

Mr. Dowling said he met with Housing and Community Development Commissioner Daniel P. Henson III shortly after buying the property in September 1994 and was encouraged to pursue uses other than housing for the Saratoga Street building. HCD officials could not be reached for comment on either the meeting or conversion plans in general.

Since then, Mr. Dowling said, he has completed a study evaluating converting the building to both apartments and a parking garage. He estimates it would cost at least $7 million to turn the Saratoga Street building to apartments.

The obstacles to conversion are legion. Issues of parking, security, location and a lack of necessary infrastructure such as nearby retail will all have to be addressed.

Those problems don't amount to the biggest challenge, however.

"The chief problem is in the economics," said Bill Struever, president of Struever Bros., Eccles & Rouse Inc., a member of the mayor's Downtown Incentives Marketing Task Force and the developer of Tindeco Wharf, an 82-year-old former tin decorating factory in Canton converted to 240 apartments at a cost of $30 million. "How do you make any money with all the costs associated?"

Included in those costs are taxes, the addition of on-site parking, removal of lead-based paint and asbestos, security, the replacement of heating and air-conditioning systems, elevators and plumbing, the addition of sprinkler systems required by the building code, Americans with Disability Act requirements and other complications that naturally arise when putting a round peg in a square hole.

Those challenges increase the amount of rent charged as well, ** since costs of development and operating expenses ultimately are passed on to residents. And in Baltimore, despite a great demand for rental housing downtown, rents rarely are enough to exceed even normal operating expenses.

To combat the vast cost impediments, Mr. Brodie is proposing various financial incentives, including tax abatements and help from the state. The BDC president may also seek assistance from Fannie Mae or other housing financing sources, he said.

"It's a great idea, but that's all it will be," said Joseph J. Fonte, president of Signature Development Co., which manages both Tindeco and the Sailcloth Factory near Camden Yards, another former factory that was rehabilitated as multifamily residences. "Because there will be a recognition that the economics of converting office buildings will not work."

That was the case with Redwood Center, two vacant office buildings downtown on Calvert Street, which BDC and some of the city's top rehabilitation developers and architects studied in 1992 to determine if apartments were possible.

In the end, though, the more than $11 million cost of converting them -- excluding parking -- was an overwhelming burden, and the project was scrapped.

Since then, Redwood Center last April was purchased by Orion Properties LLC, a Laurel construction concern, which intends to tear down one of the buildings in favor of a parking garage, and renovate the remaining eight-story building for offices. The total cost of that undertaking: $10 million, including parking.

Orion officials did not return several telephone inquires for comment on why they chose to keep Redwood Center as office space, but several real estate analysts familiar with the project said it was motivated by economics.

Of the various successful conversions -- Tindeco Wharf; the 107-unit Sailcloth Factory, renovated at a cost of $10 million; and the 98-unit Chesapeake Commons apartments on Centre Street, $11 million project -- all involved former manufacturing facilities or schools, larger buildings designed differently from office buildings.

Of the office buildings being looked at, only the Saratoga Street building fits the mold, since it was a leather tanning plant before it was redone for the city's HCD to occupy in 1970.

Tindeco and the other projects had something else in common: Tax credits designed especially for older properties and other tax-exempt financing terminated under the 1986 Tax Reform Act.

In each case, while those buildings are nearly fully occupied, they would not be at all profitable without subsidies, according to their owners and managers.

"There are lots of trails of tears that can be traced to attempts to convert offices to housing," said John R. Iwaniec, general partner of the group that owns Chesapeake Commons, a former school built in the 1860s and gutted after a fire in 1983.

The idea of converting buildings past their prime is hardly a fresh one, and various older urban areas are grappling with what to do with Class B office buildings.

Cities such as Philadelphia and Detroit are also conducting studies to determine whether converting the buildings is feasible, and private developers in New York and Washington have begun marketing former office towers as future housing.

In Detroit, where nearly 100 downtown office buildings out of 530 are largely vacant, even city boosters predict several obsolescent structures will have to be razed, said Dave Feehan, executive director of downtown and community development for Detroit Renaissance Inc.

A downtown Philadelphia business group intends to hold a news conference tomorrow to unveil the results of its year-long study on converting 10 decaying properties in a seven-block area between its new convention center and an emerging avenue of the arts, said Nancy Goldenberg, a spokeswoman for Philadelphia's Center City District group.

In comparison with the other cities, though, Baltimore is particularly handicapped because it has more older office space, much of it constructed after the Great Fire in 1904 and World War I, and because the aging edifices are scattered throughout downtown.

Market forces also have had an impact. In the wake of the local commercial real estate crash six years ago, rental rates collapsed and businesses that had traditionally occupied Class B buildings found that they could afford newer accommodations, as gleaming new skyscrapers competed to fill darkened floors.

Moreover, the phenomenon -- sort of a real estate equivalent of social Darwinism -- continues today, because commercial rents are still largely depressed downtown and because so few new jobs are being created. In all, more than 1.6 million square feet of Class B space is available downtown.

Those numbers cause owners of older office buildings, such as Robert Morrow, president of Kenilworth Equities Ltd., the city's largest Class B holder with 10 buildings including the 17-story Court Square Building at 200 E. Lexington St., to evaluate converting.

"It's something I would consider," says Mr. Morrow, whose buildings average 75 percent occupied. "But I don't know if there's enough rent in the marketplace."

Apartment managers are sure, though.

"We've not been able to move rents upward materially for several years," said David F. Tufaro, executive vice president and chief financial officer of Summit Properties, the manager of Waterloo Place on Calvert Street and another member of the mayor's economic development task force on housing.

"I'd love to see these buildings saved, but this is not the answer. It's just too expensive, and there's not enough money to go around. I'd rather see subsidies put into job creation," Mr. Tufaro said.

At Waterloo Place, a 196-unit apartment complex that cost $18.6 million to build from the ground up, owner Aetna Realty Investors Inc. achieves only a 6.5 percent return on its investment, down from the 9 percent that had been projected before construction.

On a more practical level, although Waterloo's rents average $906 per month, city property taxes per unit are $1,200 to $1,400 a year.

Still, building owners like Mr. Dowling feel they have little choice, given the suffering state of the city's office market.

"Lots of Class B space will never be occupied again," said Mr. Dowling, who also owns the vacant former Congress Hotel and has attempted unsuccessfully to convert it to apartments for five years.

"But I sympathize with the mayor -- the demands on resources far exceed the supply. But ultimately, I believe cities will not only survive but prosper. I hope I'm not proven wrong," he said.

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