REE Case Study: Highest and Best Market Reuse of Vacant Downtown Office Building

The Challenge

The owners of 1776 K Street NW (“the Client”) own a fully leased but vacant 1960s-vintage Class B office building located in the Farragut Square area of Washington, D.C.’s central business district. While the property is fully leased, it stands vacant but for some temporary sub-lease space, and is considered functionally obsolete with no viable economic prospects as an office property in its current state. In anticipation of the lease expiration, RCLCO was tasked with evaluating the highest and best reuse of the property from a market perspective. Prospective uses under consideration included: 1) value-add redevelopment/repositioning of the existing building for Class B/B+ office; 2) ground up development of new Class A office; 3) conversion of the existing building and parking structure for rental apartments, 4) ground-up development of new rental apartments while preserving the underground parking structure, and 5) ground-up development of new hotel on the site. Against this background, RCLCO was engaged to conduct an independent assessment to determine the highest and best market and financial reuse of the property.

Solution

In determining the likely highest and best reuse of the property, RCLCO analyzed the underpinning economic and demographic trends in the market; the future trajectory of the office market, nationally, and at the subject property, in particular, determining that remote and hybrid work models that gained prominence during the COVID-19 pandemic would likely persist even in a post-pandemic world, and that older Class B assets were likely to be the most negatively affected by this shift; as well as the market support for renovated and new construction of hospitality and rental apartments. RCLCO also examined case studies of recent office-to-apartment conversions to ascertain the price differential as compared to new ground up apartment developments. Finally, RCLCO calculated the residual land value of the various reuse scenarios to determine which path would result in the optimal economic outcome for the ownership group.

Impact

RCLCO’s analysis determined that the highest and best use of the subject property would be an office-to-residential conversion, as it had the greatest market potential and resulted in the highest residual land value. These findings armed the ownership group with an independent and objective view of the pros and cons of the available options and make strategic decisions regarding their investment.