Change comes to everyone, whether you are ready for it or not. The debate about whether office will continue to be needed in our modern economy rages on, but there’s no denying that the basis of demand has changed, with no going back.
I still have an office that I go to almost every day. But I work from home, my car, or a coffee shop on occasion too, since the flexibility that comes with modern paperless tech goes with me everywhere my laptop goes.
Just as shopping malls went through a process of metamorphosis, office buildings are now beginning to undergo a similar shift. Online shopping forever changed the shopping mall, and the pandemic-driven shift in the office market has left a lasting mark on how office space is used. Office space will always be needed, just as in-person shopping will continue, but not at the scale or footprint the market once relied on.
As a result, many office buildings will need to be re-adapted to another use.
The Office Vacancy Challenge
The shift toward remote and hybrid work significantly reduced demand for traditional office space in the years following the pandemic. Office vacancy rates in major cities climbed to levels not seen in decades, with some markets experiencing vacancy rates as high as 20-30% by 2023, and the national office vacancy rate setting new records through 2024 as cumulative negative absorption piled up since 2020 — a decline several times larger than what was observed during the Great Recession.
It’s important to note that not all office space is created equal. Class A, newly built office space has continued to enjoy comparatively strong rents and occupancy, while Class B and C older buildings account for most of the vacancy.
Housing Shortages in Urban Areas
At the same time, many cities face a severe housing shortage. Rapid urbanization and population growth have outpaced the development of new residential units, contributing to elevated rents and home prices. Housing advocacy groups have estimated the U.S. faces a deficit of several million affordable housing units, a shortage that exacerbates homelessness and forces many people to live in substandard conditions.
Converting Offices to Apartments: Does It Really Make Sense?
Repurposing vacant office buildings into residential apartments seems to offer a natural solution to both of these challenges at once. The benefits can include:
- Cost efficiency: Converting office buildings can be more economical than constructing new apartments from the ground up, since developers save on foundation and structural costs when the primary building framework is already in place. Adaptive reuse projects have been estimated to cost 10-20% less than new construction.
- Sustainability: Adaptive reuse reduces the need for raw materials and minimizes demolition waste. These projects also often involve upgrading building systems to be more energy-efficient, contributing to greener urban environments.
- Revitalization of urban areas: Transforming vacant office space into residential units can breathe new life into downtown areas. Increased residential density supports local businesses and enhances the vibrancy of urban centers.
Challenges and Considerations
Despite the clear advantages, converting office buildings into apartments isn’t without its challenges. Each project requires careful consideration of several factors.
Zoning and Building Codes
Many office buildings sit in areas zoned for commercial use, requiring changes to zoning and building codes. A performance code can help with design and be a real money saver on construction. It also helps to ask townships if there are vacant office buildings they would like to see rehabilitated — having them on your side as an advocate can open doors and benefits everyone involved.
Design and Infrastructure
Office buildings are typically designed with large, open floor plans, which don’t always translate easily into residential layouts. Developers must creatively reconfigure spaces to accommodate plumbing, kitchens, and private bathrooms, while ensuring adequate natural light and ventilation. Some projects even remove part of the building to gain more interior light and windows for egress, and use space that isn’t suitable for living units for amenities like gyms, a movie lounge, co-working space, storage lockers, and common areas.
Market Demand and Pricing
Developers must assess whether there is sufficient demand for the type of housing being created, whether luxury apartments, affordable housing, or something in between, and whether the building’s location on a high-traffic road or in a business park is actually suited to residential use. Buildings within federal historical districts can be worth a closer look: rehabilitated according to program standards, they can qualify for historic tax credits of 20% or more, which can make the difference on project feasibility (some states also offer their own historical tax credit programs). Creative financing, such as having the seller hold equity or debt in the project, can also help — owners who realize their options are limited may be more willing to engage in these arrangements. Generally, conversions work best in markets that can command Class A rents greater than $2/SF.
Where Does This Make Sense?
Many Sun Belt states have more flexible zoning and land use approval processes than the Northeast. As a result, a large amount of new apartment supply has been added in high-growth markets like the Carolinas, Texas, and Tennessee, where office conversions tend to happen less frequently.
Meanwhile, in regions like the Northeast, where the barrier to new product entry is higher, the conversion process is more common as demand drivers make the financials feasible.
Conclusion
The debate about office use can continue, but no one can deny that the way we use office space has changed, setting the tone for many vacant office buildings to be converted into a new use.
Investors with a careful eye for value can benefit from this trend by taking a selective, creative approach to office-to-apartment conversion.
Looking for a conversion project? Call us to discuss the right strategy and identify opportunity.
