The Path for Converting Office to Residential Is Narrow

admin  /   June 2023

Only a Few Office Buildings Satisfy the Requirements for Residential Repurposing

According to some theoretical projections, the opportunity to repurpose existing office buildings into multifamily apartments is enormous. In reality, only a narrow set of existing office buildings are truly viable candidates for such conversions.

To quantify the possible scale of office-to-multifamily conversions, CoStar has defined two scenarios, each representing a probable ceiling on what can be feasibly converted.

For this analysis, we estimate physical feasibility as buildings with floor plate sizes of 30,000 square feet in the more aggressive scenario and 20,000 square feet in the more conservative scenario.

We also use current vacancy as a proxy for a feasible acquisition-cost basis. The more aggressive scenario uses 25% vacancy, which would imply generous public support to make the numbers work out. The more conservative scenario uses 50% vacancy.

Office-to-Residential Conversions Could Require Leap of Faith — and Government Help

All office buildings in suburban areas have been excluded based on the rationale that it will almost always be more attractive financially to develop new multifamily properties in the suburbs rather than conversions.

The analysis shows that the ceiling on conversions is lower than some reports have suggested. Even under the aggressive scenario, only about 6% of the office inventory would come off the market.

Supply Challenges

Assuming office tenants relocated to other buildings, this would bring vacancy down about 250 basis points, which would still be above where it was at the end of 2019.

On the multifamily side, the aggressive scenario would add about 465,000 units to the supply, or about 2.5% of the current inventory.

This is a meaningful amount but is dwarfed by the current multifamily construction pipeline, which includes 5,200 projects, representing 1.1 million new units underway.

Given the current state of the market, the office-to-multifamily conversion narrative holds intuitive appeal. But the reality is that, while transformative for the neighborhoods in which they occur, conversions will probably be relatively rare.

At this scale, they are unlikely to impact market fundamentals on either the office or the multifamily side, let alone solve the housing shortage.

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