Office-to-housing conversions are on the rise
Transforming underutilized office space to living space can create needed housing inventory, but it's not always easy. Some cities are trying to change that.
- 2023 is seeing a significant jump in conversions as office vacancy rates remain high.
- The process can be costly, but smaller, older properties in the right locations are good candidates for investors.
- Some state and local governments are looking at ways to make the conversion process simpler and more feasible.
The pandemic changed how and where Americans work, creating opportunities to convert underutilized office buildings into residential living space.
A recent report from commercial real estate and investment firm CBRE found that these building conversions have gained momentum in 2023. The report estimated that 99 conversions are either under way or announced in 2023. By comparison, between 37 and 43 conversions were completed each of the last five years.
While 2023 is expected to be a busy year for office-to-residential conversions, the office vacancy rate is rising even faster. The report noted that if every planned conversion happens, along with the ones that have already taken place since 2016, about 2%, or 91.1 million square feet, of office space supply would be removed from the market.
While that's a significant amount of space, the office vacancy rate during the third quarter of 2022 was more than 17%, nearing a 30-year high according to CBRE.
Many of the conversions are taking place on the coasts and in the Northeast, particularly with older office buildings. According to the report, San Diego, Boston, Manhattan, Cleveland and Philadelphia have completed the most conversions in the past seven years. Boston and San Francisco have the most new projects underway.
Though costly, converting the right property can be a good investment
"Most large institutional owners won't have the risk appetite to undergo a conversion. But there is a supply of smaller, older and well-located offices ripe for conversion, and the right pricing will attract opportunistic investors," said Mike Watts, CBRE's president of Americas Investor Leasing.
Converting an office building into apartments or condominiums can be a time-consuming, expensive process. Zoning changes can take months to complete, while the cost of purchasing a property along with remodeling can make it difficult to pencil out numbers-wise.
There seems to be a sense that more flexibility is needed, however, especially in the current landscape: The National Association of Realtors estimated that the U.S. inventory of unsold existing homes was at 2.6 months, while data from the Fed put the rental vacancy rate at 5.8% at the end of 2022, one of the lowest levels in nearly 40 years.
Cities see conversions as one part of the housing shortage solution
Several cities are either looking to cut red tape to make conversions possible, or have successfully completed one or more conversions.
In Alexandria, Virginia, the Park + Ford conversion was completed last summer. Formerly a 1980s-era office complex, the two 14-story buildings now consist of 435 apartments and a variety of amenities, including communal areas that give it a boutique hotel feel, higher ceilings and bigger footprints.
For that project, a zoning change was not required by the city, saving the developers time and money, said David Haresign, a partner at Boonstra | Haresign Architects. He also noted that local jurisdictions were also willing to be flexible throughout the process. The architectural firm is now working on several other office conversion projects in the Northeast, including another in Alexandria as well as in Washington, D.C.
"Bottom line — governments don't want empty buildings… they want occupied buildings that generate revenue through property taxes, and occupants who need goods and services," Haresign said in an email.
Some state and city governments are also looking for ways to make the process simpler and more feasible. In California, a bill was introduced in March that would make it easier to convert offices into residential units, including overriding local zoning laws. The city council of Portland, Oregon, also recently approved new incentives to encourage conversion projects.
In Washington, D.C., a program was recently established to provide tax breaks for successful conversions. It appears to be working: The city has office conversion projects underway that could create nearly 2,500 more apartment units, according to Axios.
Policymakers and investors are recognizing that converting an office building into a residential property makes more sense from an environmental standpoint than tearing it down and starting from scratch, Haresign said. It also cuts down on the time to market; a teardown of Park + Ford would have added more than 10 months to the project, he said.
While office conversions alone won't make up for the inventory shortfall, and they aren't always feasible or economical, they are an innovative approach to a persistent housing supply gap.