Reimagining Office Buildings As Hospitality Destinations

Underperforming office building assets are beginning to strain investment portfolios across the country, but developers see the opportunity to reimagine these buildings to meet demand in the housing and hospitality markets.

The bright side is that outmoded office assets often have hidden strengths, and developers and designers that can unlock their potential will have an advantage in the repositioning market that is projected to have strong growth.

Fueled by the rise of remote work, national office vacancy rates stand at 16.5%, with Class-B and C assets in more dire circumstances. The ability to downsize footprints has allowed office tenants to move up in quality, increasingly gravitating toward highly efficient and amenity-rich buildings.

That means owners and lenders do not have the luxury of time to debate the long-term viability of their office spaces. Many assets will have to restructure their debt load in the next 18 months at the same time valuations could drop as much as 40%.

“We help our development clients see potential,” said Kahler Slater principal and Senior Designer Aaron Ebent. “The cost of construction and material volatility has made the industry rethink its approach to development, and the recent lending constraints are making it tough for even the best developers. Creative solutions help to remove some of those variables and create a clearer way forward.”

There is growing interest in underutilized office space due to the availability of existing building stock and high new construction costs. And office buildings often bring value as prime real estate given their key location and existing structure.

Many times, a suitable site for an office is also a suitable site for a hotel or apartment building, Ebent said.

Adaptive reuse is a strategy that has gained steam as construction costs and interest rates remain high, labor shortages continue to plague the market and attention to building sustainability becomes more prevalent, Kahler Slater principal Joe Sinnett added.

With sustainable and energy-efficient buildings becoming a higher priority, adaptive reuse is a greener option for developers to consider because the building's skin can be reused, Sinnett said.

As one example, developer HKS Holdings partnered with Kahler Slater to reimagine an underutilized office site for a full-service hotel. A prior proposal included demolishing the aging office structure and replacing it with low-density redevelopment.

But HKS Holdings and Kahler Slater saw another way — by reusing the building components on the corner property, they could drive a stronger solution, yielding a higher value.

The development team was clear that they wanted an entirely new look from the existing building. To meet that request, Kahler Slater examined the viability of a hotel layout around the existing core, utilizing the structure and replacing the exterior with a new skin. The new skin was key to transforming the building into a high-end contemporary hotel, the Renaissance Milwaukee West.

Successful office-to-hospitality conversions like that start with understanding the client’s goals and analyzing the building and hotel brand in depth, as well as working with the developer on the building’s efficiency ratio, Sinnett said.

“Many older office buildings operate at different dimensions than today’s new structures,” Sinnett said. “Though they have similar needs as far as air, lighting and floor areas, we must look at these factors closely and weigh them against each other to make sure that a project is viable.”

In the case of the Renaissance Milwaukee West, there were a few challenges the firm had to overcome to deliver the final design.

The hotel had a significant need to offer a clear-span ballroom for guest entertainment purposes — something the existing office building structure did not offer. The team developed a plan that included a ballroom addition to address those needs, Ebent said.

One challenge the team did not have to overcome was municipal support through the entitlement process, an area that has been a growing challenge to development timelines. By repositioning a distressed asset, the project gained a supportive partner.

“Adapting an existing building to a specific program is only successful when a knowledgeable design team understands how to support the developer and project," HKS Holdings principal Tyler Hawley said. "Kahler Slater's experience allowed us to leverage the site’s strengths and change course when needed."

As adaptive reuse projects continue to increase in popularity, more property owners can benefit from an experienced partner to help guide them through the process.  

“We are proud of our proven track record in helping our clients see new opportunities in conversion projects," Kahler Slater Executive Vice President Trina Sandschafer said. "Experience in office, hospitality and residential positions Kahler Slater’s collaborative team to pull expertise in multiple markets. We see solutions where others see challenges."

This article was produced in collaboration between Kahler Slater and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to [email protected].