Denver’s affordable housing shortfall could find an answer in its empty office towers

The Pew Charitable Trusts and the architectural firm Gensler have a proposition for Denver renters struggling to find a place to live that won’t bust their budgets.

Would they take a studio apartment in a renovated skyscraper for $850 a month, under half the going market rent, with the catch being that they would have to share bathroom and kitchen space and likely skip a parking spot?

Pew and Gensler are proposing a co-living, aka dormitory approach, as the answer to two problems — creating more affordable housing units and saving Denver’s aging skyscrapers, many of which face economic obsolescence.

“Half of renters are spending more than 30% of their income on rent. One quarter are spending more than 50%,” said Alex Horowitz, director of Pew’s housing policy initiative during a news conference to explain their new redevelopment model.

About half of Denver households rent, and of that group, half consist of single-person households. About a fifth of those single-renter households make between $20,000 to $40,000 a year, an income range largely underserved in today’s housing market.

Office-to-residential conversions have been a hot topic the past couple of years, especially after the shift to remote work during the pandemic left many of the city’s signature office buildings half-empty and in default on loans. But initial optimism has turned to pessimism over conversion costs and engineering challenges.

Plumbing water and sewer to the edge of a high-rise is expensive, and the large floor plates of buildings, especially those built after the 1970s, result in a lot of wasted space in the center. Design models that include windowless apartments are non-starters, and those with long stretched-out skinny apartments aren’t far behind.

Up for Growth, a housing advocacy group, estimated last year that only five out of 206 multi-story buildings, or 2.5% of the total in central Denver, represented financially viable candidates for a residential conversion. Another study, conducted by Gensler for the City of Denver, put that number closer to 16, with another 13 close behind.

Either way, a fraction of the buildings downtown can find new life using a traditional apartment or condo model. However, going with a co-living or dormitory model where sleeping areas are separated from the utility-intensive areas could lower the costs enough to make a much larger percentage of buildings convertible.

“It allows us to crush costs to a quarter or half of a traditional conversion or new construction. There are dozens and dozens of buildings that will fit these criteria,” said Wes LeBlanc, Gensler’s strategy director.

The average cost of creating an apartment under the co-living model in Denver is estimated at $123,300 per unit versus $400,000 for building a new studio apartment under a traditional model. If $100,000 is the construction cost needed to make an apartment affordable to someone earning 38% of the area median income or higher, an outside subsidy of $23,300 would get there.

Every $100 million in subsidies that Denver or a foundation contributed to a conversion project could generate 4,292 affordable units versus only 333 for a traditional studio design approach, Horowitz said. And in Denver’s case upwards of 30% to 40% of buildings could be candidates for conversion, LeBlanc said.

How the model works

A typical studio apartment runs about 440 square feet, including a small kitchen and bathroom. In downtown Denver, the average rent on a studio apartment in August was $1,420 a month. What is being proposed are private sleeping spaces with about 150 square feet and rents of $850 a month.

Utility-intensive bathrooms and kitchens are separated and relocated in shared areas, eliminating the costs associated with replumbing water and sewer utilities from the center of a building to the periphery. The smaller footprint allows more units per floor, with every unit getting dedicated window space

Gensler, with the help of Turner Construction, provides a cost template of converting an undisclosed Denver high-rise to a co-living apartment tower. Acquiring the building and land would run about $21 million and construction costs would run around $128 million with total costs closer to $152 million.

The model assumes 44 apartments per floor, with 34 single-bed units, six premium single-bed units and four two-bed units. That works out to 1,232 units or 1,344 people in the building studied. Most of the studio rooms would come with twin XL bed, a desk and chair, a nightstand, a microwave and a half-sized refrigerator. There would be a storage shelf and cabinet for personal belongings, but not much more.

Each floor would have four kitchens with the usual fixtures and appliances, including a sink, microwave, electric range, oven, etc. There would be two living rooms per floor. The existing bathrooms would be repurposed and other single-use and shower stalls added to comply with city building codes.

The rent would cover the cost of building security and the cleaning of common areas. Parking spots would run $50 a month, but there are only 110 spots, highlighting a weakness inherent in conversions. Although the downtown area has great access to transit, a large majority of tenants will have to give up their vehicles or park them further out. And Denver planners would have to bend on their per unit parking ratios.

Other sources of income include renting out retail space on the ground floor and rents from 10,000 square feet of office space. About 70% of the building’s space will be used.

Why a co-living model could work well in Denver

Several things make Denver a prime city for residential conversions. It has an elevated office vacancy rate, with around a third of all office space downtown vacant. Building prices, especially for the behemoths built in the 1970s and 1980s, are falling, lowering the upfront costs.

There is also a big gap between the going median rent of $1,820 in the third quarter and what the model estimates it can come in at. A new apartment at under $900 a month in a prime location could find a lot of takers.

Compared to say Seattle, Denver also has relatively lower construction costs, which makes the math work better, LeBlanc said.

“It brings all of these buildings onto the table that were off the table,” Horowitz said.

City planners have also been proactive about removing regulatory roadblocks. Last year, Denver launched its Upper Downtown Adaptive Reuse Pilot Program to help businesses, developers and property owners convert obsolete buildings to other uses. The program provides a coordinator to help expedite the permitting and approval process, and at some point, it may kick in incentives.

Not all cities allow co-living or congregate housing arrangements in their codes, but Denver does in mixed-use commercial areas and the zoning where the tallest buildings are located allows right-by-use, which permits conversions to residential.

One thing that could speed up conversions would be the expansion of the Denver Downtown Development Authority, which was started in 2008 to help spur development around Union Station via a special district that collected small amounts of additional property tax and sales tax revenues.

Expanding the authority to cover the Central Business District is before voters on the ballot in November. If it passes, it could generate $500 million in additional funds to revitalize the downtown area, with housing an allowed investment category.

Even if the city, building owners and developers decide the Pew/Gensler model can work, would tenants be willing to accept the trade-offs, such as a small private area and no parking spot?

“Young people are struggling to afford rent. Though salaries have been increasing, the improvements have not been enough to outpace rising rents. Denver is an attractive place to live with a strong job market, but Gen Z renters are in a worse financial position than millennials were a decade ago,” said Kara Ng, a senior economist at Zillow.

The federal government defines a rent-burdened household as one spending 30% or more of its income on rent. Zillow estimates that 61.1% of Gen Z renters are burdened, compared to 54.6% of millennial renters in 2012.

Ng said the tradeoffs individuals are willing to make will vary, but that there will be interest in any option that makes it affordable to live in a market as desirable as Denver. Zillow’s research has found that renters now prioritize features like coworking spaces and community happy hours over gyms and pools.

“That indicates these types of shared living spaces would appeal to a good portion of today’s renters, especially the most budget-conscious renters,” she said.

While the focus is on young renters, the model lends itself well to providing shared services, making it an option for housing students, seniors, veterans, the homeless and others who need additional support, Horowitz said.