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Office-to-Multifamily Conversions: What Can We Expect? 

Office-to-Multifamily Conversions

We are experiencing a huge transformation in the real estate crazes. Office buildings used to be the hubs of commerce. However, they are shedding their corporate skin and emerging as trendy apartment complexes.  

When work from home took off as the pandemic upended our day-to-day lives, office buildings stood as vacant eyesores. Now, while people have trickled back into offices over the years, vacancy rates have remained stubbornly high compared to pre-pandemic levels, shaping our new normal.

This office-to-multifamily (OTM) conversion trend is surging, fueled by remote work and a growing housing crunch.  

Is this a goldmine for investors?  What are the challenges and opportunities?  

Let’s check out the OTM conversions and see if they hold the key to your real estate success!

We will talk of converting empty office buildings into multifamily assets, and how it is becoming an emerging trend.

Understanding Office-to-Apartment Conversions

As cities evolve, so does their architecture and real estate makeup. With work and urban living dynamics evolving, this Office-to-Multifamily (OTM) conversion phenomenon, which once contributed a mere 1% to multifamily deliveries, is witnessing a dramatic surge.

The Significant Growth in Conversions

The scale of OTM conversions is staggering. Since the start of this trend in 2021, there has been consistent growth. But in 2024, we could see a record-breaking 55,300 multifamily housing units born from the shells of office buildings, more than quadrupling the figures from 2021. Cities like Washington, D.C., and New York are leading the way. The Washington, D.C. metropolitan area, in particular, plans to convert office space into 5,820 apartment units, marking an 88% year-over-year increase. Close behind, the New York metro area could welcome 5,215 new apartments from former office spaces.

Selecting Buildings for Office-to-Multifamily Conversions

Choosing the right building for office-to-multifamily conversions is more art than science, blending various factors to ensure a successful transformation:

  • Building Age: The sweet spot for these conversions is office buildings around 72 years old, notably 20 years younger than buildings previously targeted for conversion. They balance needing less refurbishment and meeting contemporary living standards, making them more viable for conversion than their older counterparts.
  • Size and Layout: Smaller, older offices with layouts that lend themselves to residential living are preferred. Ideal low-rise offices have a width between 65-70 feet, while high-rises benefit from central cores and compact floor plates.
  • Location: Location is key. Buildings in urban areas with good transit access, parking, and nearby amenities are prime candidates, especially in cities like Washington, D.C., New York, and Dallas, with abundant suitable office properties.
  • Market Demand: The growing gap between office and multifamily vacancy rates fueled the conversion trend. Rising remote work trends have increased office vacancies, boosting the demand for multifamily housing.
  • Regulatory Landscape: Construction regulations and incentives also play a role. While some rules may hinder conversions, incentives can make these projects more feasible, particularly for historic buildings.

Transforming Office Spaces into Homes: A Trend Fueled by Market Dynamics and Remote Work

Now, let’s take a closer look at the trends fueling the red-hot momentum of converting office spaces into multifamily residences: market dynamics and evolving work culture.

Market and Economic Factors

A crucial driver of this trend is the economics surrounding office properties. By 2024, a staggering $150 billion in office building mortgages will mature, adding financial pressure to repurpose these aging structures into residential units. At the same time, this scenario unfolds as the housing market confronts a shortage estimated at 3-4 million units. Needless to say, sprawling, underutilized office spaces offer a practical solution.

The Impact of Remote Work

The shift to remote work, of course, is also a significant catalyst for this trend. It wasn’t just a pandemic-era fad like many thought. According to Forbes, in 2023, 12.7% of full-time employees worked from home, with another 28.2% adapting to a hybrid model. Projections suggest that by 2025, around 32.6 million Americans, or 22% of the workforce, will be working remotely. This gradual yet steady shift towards remote work arrangements reflects a broader change in our work-life balance, with 98% of workers expressing a desire for remote work at least part of the time.

This evolution in work culture has directly impacted the demand for residential spaces. With more activities traditionally done in offices now happening at home, people seek larger, more versatile living spaces. Think of an increased need for home offices, workout areas, and recreational spaces.

Challenges in Conversion

While converting office buildings into multifamily residences represents potential, it’s a complex process fraught with unique challenges. From architectural constraints to regulatory complexities, developers have their work cut out for them.

Architectural and Design Limitations

First, architects and developers confront several design limitations:

  • Central Plumbing and Power: Office buildings often have centralized plumbing and electrical systems, which differ from what residential units require. Converting common area restrooms and adapting power systems for individual apartments necessitates extensive and costly alterations.
  • Exterior Lighting: Natural light, a staple in residential design, poses a challenge. With their deep floor plates, older office buildings may need significant structural modifications, such as enlarging windows or creating new openings, to brighten living spaces.
  • Drop Ceilings and Building Configuration: The ubiquitous drop ceilings in offices, concealing HVAC and other utilities, can make residential units feel cramped due to reduced ceiling height. Furthermore, the building’s size, shape, and structural features significantly influence the feasibility of a conversion.

Regulatory and Zoning Hurdles

The path to conversion is also laden with legal and regulatory complexities:

  • Regulatory and Cost Challenges: Adhering to residential building codes and zoning laws adds complexity and cost. Think building codes specific to residential properties, dealing with potential property taxes and construction expenses increases.
  • Zoning Regulations: Zoning laws dictate property usage. Developers often find themselves in lengthy discussions with local authorities to work through these regulations, seeking variances or rezoning when necessary.
  • Building Codes and Legalities: Compliance with building codes is paramount for safety and accessibility. Unique challenges arise in ensuring adequate light and air post-conversion, especially with mid-century offices. Moreover, developers must be well-versed in local laws, like New York State’s Multiple Dwelling Law, which governs the physical aspects of these conversions.
  • Environmental Considerations: With increasing focus on sustainability, developers must also consider environmental laws, particularly those limiting greenhouse gas emissions, adding another layer to the conversion process.
  • Adaptive Reuse Barriers: While repurposing buildings is beneficial, it comes with its barriers, including navigating the intricacies of zoning standards and innovative construction techniques.

Office-to-Multifamily Conversions: Leading Cities and Market Impact

Let’s close this out with a closer look into the regions most affected by this trend and its overall impact on the multifamily market.

Cities Leading the Trend

We briefly mentioned Washington D.C. and New York City leading the trend of OTM conversions. Still, let’s take a closer look at the data and focus on Dallas as well.

  1. Washington D.C.

National Leader in Conversions: As mentioned earlier, Washington, D.C., is at the top of the nation in office-to-residential conversions. The region’s office vacancy rate is 21.1%, underscoring the need for this transformation.

Volume of Conversions: The region is preparing for more than 5,800 residential units through conversions, almost doubling the number planned in 2023.

  1. New York

Office Conversion Accelerator Program: New York has enrolled 46 buildings in this program, with four buildings already underway to convert more than 2,100 units. This initiative is part of a broader plan to transform 136 million square feet of vacant office space into 20,000 homes over the next decade.

Housing Shortfall: The city is currently addressing a significant housing shortfall, with a pipeline of 66,424 rental units under construction and a shortage of 655,940 affordable rental homes.

  1. Dallas

Rapid Growth in Conversions: Dallas actively embraces the conversion trend, transforming old office buildings into 3,163 new, modern apartments. This figure marks a significant 58% year-over-year increase and 82.5% of the city’s planned multifamily projects.

Population and Vacancy Rates: The city’s significant population growth and high office vacancy rate propel this conversion trend. Developers have repurposed 90% of the 1,234 units underway as of mid-2023 from existing office spaces.

Impact on Multifamily Supply and Rental Rates

The numbers don’t lie, and OTM conversions are gaining momentum. However, their impact on the overall multifamily market, in the grand scheme of things, remains relatively modest:

  • Effect on Multifamily Supply: Around 47,656 units in 486 buildings have been converted since 2000, which is just around 1% of the over 4 million multifamily completions during the same period. An ambitious scenario could add approximately 465,000 units to the supply, accounting for about 2.5% of the current inventory.
  • Effect on Rental Rates: No significant evidence exists that OTM conversions have markedly influenced rental rates. In some markets, Class B office rents remain higher than Class A multifamily rents, indicating that the transition might not always be financially favorable.
  • Investor Concerns: The multifamily sector faces the challenge of managing record new supply, and the market could slog through peak deliveries of new supply. This situation, coupled with softer fundamentals and higher borrowing costs, affects property values but also opens up opportunities for investors.

From Washington D.C. leading the nation with ambitious plans for more than 5,800 new residential units to New York’s transformative Office Conversion Accelerator program and Dallas’ remarkable shift towards modern apartment living, we’ve seen how these urban centers creatively address the changing tides of work and living.

Wrapping Up: RSN’s Take On Office-to-Multifamily Conversions 

Undoubtedly, OTM conversions have potential. Yet they come with complexities and unique challenges, ranging from architectural and design limitations to intricate regulatory and zoning hurdles. The rapid rise of office-to-apartment conversions presents an opportunity to address housing shortages in major cities.  

However, design limitations, regulations, and market saturation require careful consideration.  While OTM conversions hold promise, a measured approach is crucial.

At RSN, we’d be foolish not to monitor these developments closely. However, we remain cautious and guarded in our principles. We focus on engaging in office-to-multifamily conversions and identify multifamily value-added opportunities. 

We prioritize projects that align with our strategic planning and are beneficial for our investors.

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