WorkPlace to LiveSpace still going strong
This time last year most CRE gurus we’re talking about how office building conversions to multifamily were nearly impossible. Fast forward, now CBRE has a website tracking them:
As a trusted advisor, it's fascinating to observe the recent surge in office-conversion projects, heralding a significant shift in the urban landscape. The statistics paint a compelling picture of transformation, with approximately 70 million square feet of office space, constituting 1.7% of the total U.S. supply, undergoing conversion to other uses in Q1 2024. This surge represents a notable increase from the 60 million square feet recorded in Q3 2023.
Projections indicate a doubling of office-conversion completions this year compared to the previous, with hundreds more projects lined up in the pipeline. The implications are profound, with urban office districts evolving into dynamic, commercially diverse hubs.
Notably, around one-third of the conversion projects are slated for multifamily residential use, marking a significant shift in urban development paradigms. The momentum is palpable, with 120 office-conversion projects nationwide expected to reach completion this year alone—a stark contrast to the annual average of 45 observed between 2016 and 2023.
The dominance of office-to-multifamily conversions underscores a fundamental reshaping of urban living spaces. Since 2016, over 22,000 apartments have been created through 133 such conversions, with an estimated 31,000 more apartments expected to emerge from the 169 projects currently underway or planned.
Yet, it's essential to acknowledge that while these conversions represent a promising trend, they offer only a modest contribution to addressing the broader housing shortage in the United States. Nonetheless, they hold immense potential for revitalizing urban centers and repurposing underutilized spaces.
Examining the geographical landscape, it's evident that markets abundant in older office buildings witness the highest conversion activity. Cities like Cleveland and Houston stand out, with substantial percentages of their office inventory undergoing or planned for conversion. Notably, Cleveland's downtown district serves as a compelling case study, illustrating the transformative impact of converting outdated office spaces into vibrant residential and hospitality establishments.
However, despite the allure of repurposing vacant office buildings, the financial challenges associated with such endeavors cannot be overlooked. Conversion costs, range greatly from market to market based on the mechanical and electrical systems implemented, compounded by high interest rates. Nevertheless, the prospect of falling interest rates in the near future offers a glimmer of hope for prospective developers.
In response to these challenges, many state and local governments are exploring avenues to incentivize conversion projects, including subsidies, zoning relaxations, and expedited approvals processes. This public support underscores a collective commitment to reimagining America's downtowns and fostering sustainable urban development.
In essence, the journey from office to apartment conversion represents more than just a physical transformation—it embodies a paradigm shift in urban planning and design philosophy. As architects, we stand at the forefront of this movement, poised to shape the future of our cities through innovative repurposing and adaptive reuse strategies.
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In midtown Manhattan 84% of total leasing activity has occurred in Class A or trophy assets.
This flight to quality office buildings can be new or recently renovated, and they tend to be filled with amenities and in gateway cities near transit hubs. For example, since the start of the pandemic, 84% of total leasing activity in midtown Manhattan has occurred in Class A or trophy assets, according to Cushman & Wakefield.
Refusal of the Call:
The initial response to this call was hesitation. Developers were concerned about the high cost of conversions, parking, zoning and the impact of the pandemic. Slowly cities are seeing their income being devastated by dropping values and tax revenue and are motivating building owners through financial incentives and zoning exceptions. Here’s where we are seeing opportunities.
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Top 15 Cities for Office Space Conversion to Apartments (CBRE)
Chicago
Dallas/Fort Worth
Houston
Hartford and Fairfield County in Connecticut
Kansas CityÂ
Louisville, Kentucky
Minneapolis/St. Paul
Pittsburgh
Milwaukee
New Jersey
Washington, D.C.
Multiple cities in Ohio
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Developers of 64 office buildings in NYC have participated in the city’s Conversion Accelerator Program for office-to-residential transitions. And the program isn’t wasting any time. Many of the 64 buildings have already been successfully converted or are in the conversion process, with 2.1K new apartments in progress.Â
The initiative aims to streamline the process of converting offices into dwellings as the city looks to create 20K new apartments over the next 10 years to alleviate the city’s infamous housing shortage.
The Conversion Accelerator Program brings together diverse city agencies to facilitate zoning assessments, permit acquisitions, and project advancement. This A-team includes reps from City Hall, the Department of City Planning, and other key CRE agencies. They will work collaboratively to evaluate the feasibility of conversion projects and provide necessary support to developers.
In the midwest there is a similar story unfolding:
According to KBRA Analytics, Chicago has the highest default risk of all major U.S. cities, and its office vacancy rate far exceeds the average. The situation is so bad that some downtown office buildings have sold for less than 25% of what they were valued a few years ago.
Specifically, the beleaguered city’s office vacancy rate has soared to 16.3%, up nearly 37% from the 11.9% rate reported in early 2020. By comparison, the U.S. average office vacancy rate is 13.8%, according to CoStar.
Even worse, nearly 75% of the office mortgages that have been converted into securities are either in default or at risk of default, the highest of any major metropolitan area in the nation.
That’s probably why the city is busy offering substantial public subsidies to help office owners and developers convert obsolete offices into residential and hospitality properties.
Mayor Brandon Johnson is very much on board. His administration is building relationships within the CRE sector to take advantage of the city’s historic building designs, which are perfectly suitable for conversion opportunities.
His main initiative? A $1.25B bond for affordable housing and central business district development, which received widespread support. In April, Johnson supported a $150M plan to convert four vacant office buildings in the city’s central business district into 1K apartments. He also recently appointed Ciere Boatright, a CRE executive, to lead the city’s Department of Planning and Development.Â
Chicago isn’t the only city busy converting unused office space into apartments and hotels. Many cities are moving forward with or without public subsidies. In 1Q24, nearly 70MSF of office space was being converted, up from 60MSF in 3Q23, according to CBRE.
So what does all this mean? With the team of trusted advisors, the opportunities for generational wins are unfolding before our very eyes and we are excited to be leading the effort.
Sources:
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