When Do Office-to-Resi Conversions Make Sense?

Want to understand real estate better? Last chance to sign up for Thesis Driven’s Fundamentals of Commercial Real Estate course taking place on May 8-9th at 3 World Trade Center in NYC. Learn more here.

One of the most common topics of conversation in real estate over the last couple years has been the “1 billion square feet of empty office space” left in the wake of the COVID-19 pandemic. When juxtaposed with the second most common topic in real estate—the US housing shortage—a straightforward solution seems to be in plain sight. Too much office. Not enough housing. Perhaps it's time to turn some of that office into housing. 

Surprisingly, not many real estate professionals have been big proponents of office-to-residential conversions. Most developers, in fact, seem to think they are a wild goose chase. Here are a few opinions pulled from X and LinkedIn:

“It’s amusing how much talk this gets considering the amount of viable projects is not going to be meaningful in the big scope of office vacancy”

“The conversation is missing back of the envelope estimates of how many underutilized office buildings are even remotely viable”

“I have yet to meet a single person who thinks office to resi conversions are something that can be done at scale. Most developers don’t even want to think about it due to how unique the building has to be for it to work in the first place” 

These quotes are from real estate professionals with significant experience. But in the face of that negativity, some conversions are clearly happening, and analysts predict that the pace of office-to-residential conversion will continue to accelerate. Today’s article will explore this apparent contradiction, including:

• What it takes to convert an office building into housing;
• The impact these conversions could have on the housing market and cities;
• The challenges of office-to-residential conversions;
• Several examples of office-to-residential conversions in action.

Specifically, we will hone in on what makes a good candidate for an office to residential conversion which, generally, is a building that falls into at least one of three categories:

• Old: prewar buildings tend to have narrower floor plates, making them a better fit for conversion;
• High-rent: more complex conversions make sense in cities with astronomical rents, allowing for renovation budgets that include significant structural surgery;
• Overbuilt or Historical: landmarked buildings and overbuilt structures often must be converted rather than demolished and rebuilt, due to their historical significance or other zoning factors.

Read on for more…