Commercial Conversions

Regulations play a role in differentiating the two categories. Commercial properties follow rules that are more complex than their residential counterparts. These regulations and building codes address issues such as zoning, accessibility, occupancy loads, and system requirements for different businesses. Residential properties are subject to building codes and regulations prioritizing safety and comfort, focusing on issues like structural integrity, fire safety, and livability.

All these factors come into play when determining if a commercial building can be converted into a residential building, in addition to other resource considerations such as budget, time, and availability of labor. Larson says there are instances in which conversion will pencil as financially feasible. For example, in communities with limited housing options—where inventory creates a scarcity effect on rents and market prices, combined with developable land in commercial areas—Larson says there is a significant benefit of converting properties to residential use.

“Conversion can bring inventory to the market which can aid in keeping people in the community that are in need of housing,” says Larson. “It can also bring relief to prices and rates which have been held high by these market influences.”

Larson emphasizes that the ideal property for conversion is a small segment of existing commercial properties. In most situations, she says, conversion will not be financially feasible because it often only makes sense during a time of scarcity. If a return to normal happens, the conversion may no longer be profitable, but the property is stuck with its new purpose.

A Shining Example

The Emerald Building is living up to its Chez Braun moniker, recently converted into assisted living for seniors. Each floor is allocated for different uses and types of care. The ground floor hosts Roberto’s, a Mexican restaurant open to the public. Floors two through five offer senior assisted living and additional care programs. Floors six through eight provide space for the Emerald Adult Day program, where elders can socialize with peers, participate in staff-led social activities and games, and attend community events.

Hultquist Homes purchased the building in May 2022 with the intention of converting it for residential purposes. It was previously a commercial location for multiple businesses, including a dentistry, accountant, and legal firm.

“It required a complete overhaul that took time,” says Julie Drayton, manager of the Emerald adult day program. “Once the building was complete, it took time to finalize all the permits for the change from a commercial building to a residential one.”

Hultquist Homes is no stranger to developing residential housing or senior assisted living in Alaska. In addition to building residential housing for the past forty-five years, the company recently developed a new senior facility in Anchorage called East View Assisted Living; another one is under development in South Anchorage. However, Drayton says that repeating a conversion project like The Emerald is something the owners would only consider under the right circumstances.

“They said that if they do it again, it would have to be a building that would meet a specialized need,” says Drayton. “It would also depend on the age of the building, the size of the lot, and the estimated price for converting from commercial to residential.”

Practical Limits

A commercial building may have the space to create smaller residential units, but the space usually isn’t adequately partitioned for residential living. The need for renovation drives up cost. That’s the primary reason why few commercial-to-residential conversions happen in Alaska, according to Ryan Schwalbe, who handles commercial real estate sales and leasing at Spire Commercial.

A commercial building has a limited number of bathrooms configured for shared public use, meaning additional bathrooms with additional plumbing are needed. This also holds true for other systems like HVAC and electric wiring for lighting and outlets. A successful conversion means digging deep into the building’s infrastructure and, most likely, demolishing parts of the building before retrofitting it with a new layout and systems design to meet an entirely different building code. Schwalbe says these types of changes, depending on the structure, can easily cost millions of dollars.

“I would ask anyone who wants to complete this kind of a conversion how deep are their pockets,” says Schwalbe. “Conversions are expensive. There are many roadblocks and unforeseen issues.”

Schwalbe adds that some buildings are simply not suited for conversion due to a lack of windows for natural light or emergency egress, or they have extreme ceiling heights that make HVAC and electrical retrofits impossible.

When looking at The Emerald, Spire Commercial owner and broker Hugh Wade believes that the owners will see a quick return on investment, given that the income from round-the-clock senior assisted living is reasonably high. Monthly prices for senior care at The Emerald depend on the level of service, but a base cost is around $12,000 per month. Average rent for residential housing is much lower, of course, which means landlords and investors would possibly have to wait much longer before seeing a profit.

“That’s a lot of financial risk,” says Wade. “In general, those who are looking at this option have experience in this kind of development.”

Lottie Michael, senior vice president of the commercial division at Berkshire Hathaway HomeServices Alaska Realty, says conversion of The Emerald doesn’t necessarily point to a trend in Alaska. She says not many commercial properties have been successfully redeveloped into residential, given the extent of changes necessary to meet current building codes.

“Talking about conversion is a great soundbite but financially unfeasible,” says Michael. “A complete demolition and new construction are often the least expensive option.”

Michael says it would take many changes before commercial-to-residential conversions are feasible, such as less expensive labor, materials, and utility costs. She says property tax abatements and incentives are not enough to make this kind of project profitable because the reduction in property tax is generally only for a defined period of time.

Larson agrees that feasibility is about matching capability to need, not forcing it. She says Alaska is also unique, so even if conversion works elsewhere, Outside trends seldom produce the same results when tried here.

“Lowering the logistical costs of materials or finding locally sustainable alternatives is a more long-term solution,” says Larson. “If we can solve those problems, we’ll solve a lot of Alaskan problems.”