Office-to-Residential Conversions to Rebound

Office-to-residential conversions remain a favorable strategy, as property owners look to reduce their exposure to the sector and breathe new life in underutilized buildings.

More than 500,000 multifamily units are expected to come online this year, according to the latest Yardi Matrix forecast, should market conditions hold. Meanwhile, 151,000 apartments are underway in various stages of conversion across the U.S., of which 58,000 are to be redeveloped from office properties, according to a recent RentCafe report.

Key takeaways of the RentCafe report:

• From 2010 to 2023, a total of 160,291 converted apartments came online across the U.S.
• Last year, 12,713 units were delivered in conversion projects, up 17.8 percent year-over-year.
• There are currently 151,000 more units in adaptive reuse projects in various stages of development, almost as much as the completions of the past decade and a half. Of those, 40,000 units are already under construction.
• Almost 40 percent of the current pipeline is in former office properties, followed by hotels, at 22.5 percent.

Washington, D.C., leads in office conversions

Developers are currently working on 151,000 units in adaptive reuse projects, in various stages of development. This was a 24 percent increase from 2022’s 122,000 total projected units. Office properties comprise a significant portion of this pipeline—38.5 percent, or 58,000 units.

Washington, D.C., is projected to have the most office-to-apartment conversions, with 3,000 units in various stages of development. Owners are reutilizing older office stock, such as the recently completed 689-unit Upton Place on Wisconsin. A joint venture between Donohoe Development and Apartment Investment and Management Co. started work on the $300 million conversion in 2021.

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When it comes to the overall number of upcoming conversions, however, Los Angeles takes the lead with 5,881 units underway, out of which roughly 1,700 will be from office assets. Manhattan came second, with 4,363 units, more than half from office.

Adaptive reuse increased 17.8 percent year-over-year

Over the past 14 years, developers completed 160,291 apartments in conversion projects, leading to an average of 11,449 units added per year. In this time frame, 2016 and 2017 represented a peak for adaptive reuse to residential, with 16,408 and 16,533 completions recorded, respectively.

In an unprecedented twist, hotels surpassed office as the number one asset type for conversions. In 2023, 4,566 units were brought online from former hotels, a 38.8 percent increase year-over-year and 36.0 percent of all conversion projects. Meanwhile, office buildings comprised only 28.0 percent of completions, amounting to 3,587 units—a 3.8 percent uptick year-over-year

Last year, a total of 12,713 units came online in adaptive reuse projects, which was a 17.8 percent increase from 2022 and above the average of the 14-year time frame. Manhattan led this ranking, with 733 apartments completed.

All of Manhattan’s new units were converted from vacant hotels, with the largest one being 525 Lexington Ave., which is now student housing. The 34-story property, operating under the brand FOUND Study, now comprises 1,355 beds and 406,261 square feet of bedrooms and amenities.

Following Manhattan, Richmond, Va., took the second spot for completions recorded last year, with 662 units added. This amount tripled year-over-year, with a significant portion coming from the transformation of the historic Model Tobacco Factory at 1100 Richmond Highway into 203 luxury apartments.

Alameda, Calif., took the third spot, with its 372 units developed from a former warehouse property. Other completion highlights included two Ohio entries—Cincinnati and Cleveland, with 342 and 282 units, respectively.

Atlanta suburb leads in office-to-residential conversions

Peachtree Corners, Ga., took the top spot for office-to-residential completions in 2023, with a total of 295 units. Alliance Residential Co. developed all of these in a single project, the conversion of a vacant office building at 5672 Peachtree Parkway.

Two Midwest cities took the second and third spots—Milwaukee, Wis., and Indianapolis, Ind., with 216 units completed each. The remaining cities in the top 10 for office-to-residential completions ranking all had one project each brought online last year.

As older office stock continues to run its course in terms of popularity, developers are bound to continue focusing on conversion to residential as a solution whenever the buildings permit it. As the latest CommercialEdge report showed, the national vacancy rate for office properties was 18.2 percent in March, while the move to the suburbs continues to grow, leaving older assets ripe for conversion.