Office Conversions Run at a Record Pace

The office-to-housing conversion trend is rushing toward another record year as developers move to take advantage of the live-where-you-work movement while preventing the possibility of foreclosure as mortgages come due. 

Last year, according to the latest RentCafe data, 45,200 apartments were crafted out of old, empty office space. And at a significant increase, 55,300 units are in the pipeline for this year.

“That’s more than a four-fold increase since the trend began” in 2021 when unused office space gave way to just 12,100 apartments, the report said. It called the growth “extraordinary.”

Record breaking activity

The average age of converted office buildings is 72 years, which is old in the income property sector. But age is relative; That’s 20 years younger than the structures that have already been converted, noted RentCafe.

Younger buildings—even those nearly three-quarters of a decade old—might require less money to refurbish and will more likely meet modern standards, potentially simplifying a cumbersome conversion process, the report suggested.

“The urban landscape is getting a makeover, shifting from corporate to community,” the report said. “Office buildings, once the epicenters of the 9-to-5 grind, are being transformed into the new homes of urbanites, in a pandemic-driven remote-work new reality… Clearly, the buzz of business is giving way to the hum of home life, right where the city’s heartbeat used to.”

Also, the some $150 billion in office financing that is due this year is another key factor behind the office-to-apartment trend. “As residential space demand surges, developers are leaping at the chance to repurpose these aging giants,” RentCafe said.

In the adaptive reuse category, office conversions are outpacing any other building type. When it comes to future adaptive reuse apartment projects, office conversions represent 38 percent of the total 147,000 units. “That’s not just the largest slice of the pie,” according to the report, “it’s a record.”

Top markets for conversions

Sitting with acres of empty office space that has been vacated by Uncle Sam and the three main tenants propping up Washington, D.C.—attorneys, accountants and associations—the Capital and its environs is the top market for conversions. It is followed by New York City and Dallas.

The Washington, D.C.,-Northern Virginia area, where office space is set to yield 5,820 apartments in 2024, is at the forefront of the adaptive reuse movement. The area’s share alone accounts for almost a third of the total conversions in the pipeline in the Nation’s Capital region. One property alone will convert to 691 units.

Not far behind, the New York-Newark-Jersey City area has 5,215 in its office-to-apartment pipeline. The conversions there account for almost 45 percent of the region’s future multifamily properties. One Manhattan conversion is being transformed into 1,263 apartments.

A whopping 83 percent of the apartments in the pipeline in the Dallas-Fort Worth-Arlington area—3,163 units—are coming from former office buildings. One will yield 500 units on its own.

Chicago and Los Angeles round out the top five markets for conversions. Despite a 9 percent drop off from last year, Chicago is set to produce 2,822 future apartments from office conversions this year. And Los Angeles is set to produce 2,442 units from conversions.