Office-to-Residential Conversions
Building owners have a choice to make.
As vacant offices proliferate, building owners are confronted with a tough choice: do they hang on and hope business tenants return, or do they repurpose the structure into something else, like apartments?
With companies offering remote work options to attract highly qualified talent outside big cities, many owners are choosing to repurpose.
According to a recent report on adaptive reuse by nationwide apartment listing service RentCafé, more than 55,000 apartments are scheduled for conversion from old office space in 2024, with another 92,000 office-to-apartment changeovers in motion for the future. Typically, such projects are cost-prohibitive for developers because of the structural changes needed to turn office buildings into apartments, but city and state tax credits are offsetting some of the additional expenses.
Real estate developer Metro Loft Management has converted eight office buildings in Manhattan into apartment complexes, adding a reported 5,000 units to New York City’s housing stock. Metro Loft has also signed a contract to convert Pfizer’s former headquarters in Manhattan into 1,500 rental apartments. Another developer, Cohen Brothers Realty, recently filed for a permit to convert the upper floors of the Saks Fifth Avenue flagship department store, previously used as office space, into 172 residential units.
In Los Angeles County, the Rand Corporation estimates that as many as 113,000 housing units can be developed from 2,300 “potentially underutilized commercial properties.” Real estate services and investment firm CBRE, which has already repurposed 42 office buildings in Los Angeles County into apartments, plans another 217 office building-to-multifamily conversions.
Similar conversions are underway across the country from Dayton, Ohio, to Austin, Texas. The trend offers a way to kill two birds with one stone: many big cities undermined by high office vacancy rates also struggle with affordable housing shortages. A greater supply of apartments would create competition driving down high rents.
Not that converting offices into apartments is simple, says Alexandra Glickman, senior managing director at Gallagher and leader of its global real estate and hospitality practice. “It takes a tremendous amount of money to profitably pull it off, since the plumbing and the electrical need to be retrofitted,” she says, adding, “It’s typically not as easy as it seems.”
“Old office buildings have one bathroom per floor, whereas apartments have one or two bathrooms multiplied by the number of apartments per floor,” says James Stuart, chief sales officer and real estate practice leader at Hub International. “You also need special permits to do the conversions, which aren’t easy to get. If the office building is not in a desirable location, it affects what you can charge for rent. That then makes the financing a challenge.”
While Paul Foye, managing director and U.S. real estate practice leader at Marsh, largely agrees, he sees an upside. “A lot of things need to line up for the repurposing to happen on a broad scale, but the growth in the availability of tax credits in New York and Boston, where I live, are creating a financial incentive,” he says.
Not just cities are subsidizing the changeovers. The White House recently released a “Commercial to Residential Conversions” guidebook, which details more than 20 federal programs across six agencies that support the conversions with development grants, below-market loans, and land dispositions.
The concept has widened to comprise retail-to-residential conversions, with nearly 200 zombie malls across the country reportedly slated for adaptive reuse into multifamily residences.
