Converting office space to residential? Evanston officials mull moving in that direction with downtown office vacancies at an all-time high

By Bob Seidenberg

Evanston’s downtown office space vacancy has hit its highest mark since the financial crisis of 2009/2010.

The city might want to look at converting office space to residential as a strategy to fill the unused space, Paul Zalmezak, the city’s economic development manager, said in a presentation to the Economic Development Committee (EDC) Wednesday night.

Zalmezak made the suggestion in a presentation to the committee, which included the latest figures on office and retail vacancy trends.

An ‘alarming’ figure

The downtown office vacancy rate is up 53% since the first quarter of 2020, which included the start of Covid, and 150% since the city’s 10-year low in 2017.

Office vacancies rates are now approaching 18% in downtown. Credit: City of Evanston

“Right now we are at an alarming 17.8%,” Zalmezak told committee members.

Office rate vacancies are up nationwide, continuing a trend that started when the pandemic hit. The city of Chicago passed its former vacancy rate high, reaching 23.8% in the final months of 2023, Crain’s reported.

Locally, in 2017, Evanston, when vacancies fell below 10%, office developer interest grew, Zalmezak said in his report. Prepandemic, a vacancy rate that low suggested there was room in the market for more office spaces, he said.

With the pandemic, though, larger companies downsized their space needs, and more employees worked remote.

“It’s the bigger buildings we are more concerned about,” Zalmezak said in a note, responding to a reporter’s inquiry after the meeting. “Thousands of office workers have not returned. What happens to those buildings if the work-from-home trend never ends? Either large companies take smaller spaces, opening up more space for additional smaller companies. That will take a few years. Or they remain vacant, but very, very difficult to convert to other uses.”

Retail vacancy rate has also climbed

The downtown retail vacancy rate is up, too – 73% since the first quarter of 2020 and 157% since its 10-year low in 2017, according to the figures Zalmezak drew from CoStar, the commercial real estate information site.

Since the pandemic, retail vacancy rates in Evanston have been on a climb.

Notably, rent growth for downtown retail has averaged 2% since the pandemic.

“That’s good for tenants because that means rents are flattening out and cheaper,” Zalmezak told committee members. “But it could be a problem longer term for the city because that might suggest that property values are declining.”

The CoStar figures, however, don’t reflect a Life Time Fitness lease agreement for the former LA Fitness property at 1718 Sherman Avenue, which was approved by the Evanston City Council on Tuesday night.

Life Time’s move into the building will reduce vacant square feet space by 53,000 square feet, dropping the retail vacancy rate to 17%. That figure still stands in line with the previous worst peak during the financial crisis in 2009-2010, he said.

Zalmezak brought into the discussion interest nationwide about converting office space to residential.

In an article published last July, author Stefan Von Imhof maintained the idea is simple: “Cities have too much office space and insufficient housing. Why not just convert all these office buildings into apartments?”

Not all buildings are equal

In Evanston, certain office buildings are better candidates for residential than others, Zalmezak said.

Modern office buildings, which fall in the Class A category, are designed with an elevator core and adjacent plumbing that are not ideal for residential, he said in his presentation.

Buildings in that category include the 364,000-square-foot Orrington Plaza building at 1603 Orrington Ave., 83.86% leased; the 393,303-square-foot One Rotary Center at 1560 Sherman Ave., 96.52% occupied; the 175,575-square-foot Evanston Labs building at 710 Clark St. (the former Burger King site); the 195,098-square-foot Evanston Station building at 909 Davis St., where the city is scheduled to move its offices this year.

On the other hand, Evanston has a number of older and smaller office buildings that tend to fall in the class B and class C market segment with “low conversion rates, an attractive original cost basis, and in an area where residential properties have high NOI (net operating income),” Zalmezak’s research showed.

Those earlier built buildings were constructed in such a way that the interior space “was just a short distance from an operable window, both for natural light and to cool things off during the summer time,” Zalmezak said in his notes to the presentation.

He included a number of the offices in his presentation that fit the profile but where residential conversions were not likely.

One was the 5,600-square-foot, two-story 1020 Church St., built in 1923, and considered briefly as a shelter to house migrants earlier this year.

The council nixed that idea.

Since then, that building and the parcel next to it are already being considered for redevelopment, Zalmezak said, and not for reuse or adaptive reuse under the office-to-residential model.

Encourage people ‘to come out of their houses’ 

Zalmezak stressed to the committee that “I am not in any way presenting this to suggest that we’re going to have some policy shifts. I’m just pointing out a very small number of offices that we have in town that kind of qualify for this kind of broader good conversion candidate” consideration. And there aren’t many.”

EDC member Lisa Dziekan, senior vice president of business development at World Business Chicago, struck a hopeful note.

“I do think that return to office – if you’re riding the train every day as I am – those numbers are continuing to inch, inch, inch up. And there’s ways that we as a community and as an economic development committee should think about how do we encourage people to come out of their houses – whether it’s going to their office building or enjoying our retail locations. I think there’s innovative ways that we should be thinking about that.”

In July, Zalmezak said officials hope to present new data sets to the committee for use in exploring their next steps.

The data is to include business district foot traffic/visitation date, retail vacancy rates, Tax Increment Funding balances, and also a Chicago North Shore Convention & Visitors Bureau update.

Burns: Start with one project

EDC and Council Member Clare Kelly (1st Ward) pointed to new federal programs that have made funding available to “jumpstart” office-to-residential conversion.

Another EDC and council member, Bobby Burns (5th Ward), urged the group not to get overwhelmed about the challenge before them, and look at everything that could possibly be done.

“We know that every building and every class of building … won’t make sense to convert,” he said. “But if we identify one project where it does make sense we can start to arrange the pieces to get that done.”

“Let’s take a look at it. Let’s evaluate it. Let’s see if we can come up with the funds to do that,” he said.

Council Member and EDC member Jonathan Nieuwsma (4th Ward), chairing the meeting, spoke about the importance of adding as much data as we can to the monthly reports members receive.

“I’d like to see the other districts, not just downtown,” he said. “It might be useful to see some benchmark data, whether that’s regional or state or national, just so we can kind of track ourselves.”

Zalmezak stressed that the presentation was intended for the committee to think about policy on the conversions of office buildings to residential. As of right now, the city doesn’t have any tools in place, like a new innovative funding stream that could help buildings move in that direction. Much will depend on the market place.

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