The practice of converting office buildings into apartments is at an all-time high in the United States, according to a recent report. Of the nearly 32,000 apartments created through adaptive reuse since the start of the decade, 41% are in converted office buildings, according to the RentCafe analysis.
“Existing buildings already have a lot of embodied energy that has gone into creating them, and as long as we can get them a new lease on life, then that can be a very sustainable thing to do,” says Strachan Forgan, an architect and principal at Solomon Cordwell Buenz. “And so, conversion to residential can really increase the life span of the building.”
Inflection point
Whether the pandemic, and the increasing numbers of people working from home, will accelerate the office-to-apartment conversion rate remains to be seen.
While there is a strong recovery in certain property markets, such as multifamily, industrial and retail, the office and hotel property markets have not bounced back as quickly, according to the National Association of Realtors (NAR).
The real estate organization says continuing COVID-19 concerns and the rise of the delta variant have slowed the return of workers to the office, while also grounding travel for business and pleasure. In addition, office rents have declined.
“We're at an inflection point, potentially,” says Forgan, whose firm has converted a San Francisco high-rise office building into apartments and is working on a similar project in Hawaii. “Generally, employers have not made radical changes in the amount of space that they need … but that could be coming as workers return to the office. We may find that some of them don't want to return to the office, and that will generally lead to lower demand for office space.”
‘Exception rather than the rule’
Transforming old buildings is a sustainable way to add new housing, especially since most of the infrastructure, including roads and public transportation, is often already in place.
And converting, rather than building from the ground up, can simplify the approval process.
“It's maybe faster or easier to get a conversion project approved, particularly in markets, such as California, where it's very hard to get new projects entitled,” Forgan says. “It's just not always a slam-dunk, because there are some other things about the building that can be impediments to conversion.”
Those impediments are the reason why office-to-apartment projects tend to be the exception rather than the rule, Forgan says.
“Zoning and permitting are probably two of the biggest costs,” says Doug Ressler, manager of business intelligence at Yardi-Matrix, which provided some of the data for the RentCafe report. “Zoning and permitting are different for every area in the country; most have been started from local ordinances and things like that and built up. So, how do you get through that? Because some areas will not allow for multifamily (housing) in a given place; they're single-family only.”
And then there’s the floor plate — the distance from the elevator to the facade, where the windows are — to consider. When the floor plate’s too large, it’s hard to design apartments that get enough natural light.
“Typically, the building systems are at the end of their life, as well, so, you have to replace all of the mechanical, electrical and plumbing systems,” Forgan says, adding that it’s rare to get an entire office building free of tenants. “If there's multiple tenants in a building, it's difficult to get a large block of space that you can convert without moving tenants around or moving them out of the building.”
Historic office buildings are often good candidates for conversion due to their smaller floor plates, he says.
An NAR survey of its commercial members found that 84% of respondents are using the same amount of office space as before the pandemic, but 11% reported a decrease in office space.
“People are really reassessing whether the workers are going to return to these office spaces. And potentially, there's a lot of office space, therefore, that could be available for conversion,” Forgan says. “I don't think the office market has really reacted to that yet, because it's really an unknown.”
Retail conversions
NAR reports that retail spaces, led by shopping malls, are continuing to recover. But the big box department stores that lost out to online shopping might be getting a new lease on life by facilitating the delivery of internet purchases.
“Some of that can be reconverted to e-commerce warehousing for industrial purposes,” Ressler says, “or they can be reconverted into fulfillment centers, because the main thrust for fulfillment centers — whether it's Amazon, Google, fill in the blank — is how close of proximity do I have to the people that use my product?”
Neighborhood retail centers known as strip malls are also bouncing back, according to NAR. Part of that recovery might be attributable to strip mall owners exploring new options when it comes to tenants.
“Retail strip centers right now are being very quickly reconfigured, especially for medical offices and urgent care,” Ressler says. “If you have a large (hospital) provider that says, ‘I'm going to reduce my costs … I'm going to create this urgent care center in this strip mall that has offices that are sitting vacant, I can do that. I can repurpose it.’”