The Search for Multifamily in Commercial Space
There’s a growing buzz around conversion of offices to apartments, reducing vacant office space while addressing America’s housing shortage. But how viable is it?
Over the past few months, attention has centered on conversion of office buildings to multifamily. It’s often been suggested as a solution to two problems: elevated commercial vacancies due to office workers’ slow return post-COVID and America’s severe housing shortage. Due to costs and complications, conversions don’t really resolve either problem—but that doesn’t mean individual opportunities can’t produce good results.
Conversions of a variety of commercial properties have been pursued—often successfully—for years. While hotels have proven the most natural alternative, given their more robust plumbing and suitably placed windows, office, industrial and even retail properties have found new life as apartments, often with distinctive personalities. In fact, after artists seeking less expensive and more expansive space popularized industrial warehouses-turned-loft apartments back in the 1960s, a wide range of other residents followed, attracted to the gritty, creative, Bohemian feel and willing to pay what have become often very high rates for the experience.
Office, of course, represents a different type of challenge, given its generally higher price point and more central location—which while theoretically attractive is likely to lack the draw of a neighborhood feel. Plus, while historic buildings may come with built-in charm, those built in the latter half of the 20th century often lack the personality that convinces residents to pay what’s needed to make them pencil.
But such conversions have been successfully completed in recent years, as Fotios Tsarouhis details in “Is Converting Office Into Multifamily a Good Fit?” indicating that while they’re not for every property, they can work well for the right property. The Urban Land Institute and National Multifamily Housing Council in February reported the results of a survey of some 30 developers that have converted a range of commercial properties. While they affirmed there is no cookie-cutter solution, they identified several key characteristics needed for success:
- Expect the unexpected: You never know what you’ll uncover or how much structural bolstering may be needed to accommodate things like additional plumbing. Ensure you have a team that can adjust as needed.
- Be creative in structuring financing, which may include a variety of tax credits—provided requirements aren’t cost prohibitive. For instance, you may want to weigh the benefits of historical charm against the costs of adherence.
- Consider the impact of time savings on internal rate of return: If the building structure can be adapted (which is not always the case), reuse can save six to 10 months over laying a new foundation, and even more time for engineering and design. A change in zoning can preempt this advantage, however.
- Don’t be deterred by existing tenants. They may be willing to move.
Finally, be realistic. Not every building is right for conversion.