Office-to-Residential Conversions Are Not the Magic Bullet Many Think They Are

Just a few years ago, office buildings were bustling hubs of activity. The symphonic medley of keyboard clacking, paper shuffling, and buzzing conversation around the water cooler served as the main accompaniment to the city’s music. But the tune has changed after COVID-19 swept in and crippled the office market. We all know the story by now: a novel virus made its ugly debut, businesses screeched to a halt, and a shift to remote work ensued. As time passed, it became clear that many white-collar employees could perform most (if not all) of their job duties from the comfort of their own homes, prompting many companies to continue offering remote and hybrid work options even as the pandemic waned. This led to a decrease in demand for office space and a surge in office vacancies that have persisted to this day. Now developers and investors are looking for ways to repurpose office buildings to reignite downtown city centers. But what are we going to do with all these half-empty office buildings, and is converting them for residential use the best solution?

Projections for future office demand look grim. A new report from commercial real estate services firm Cushman & Wakefield states that the United States is currently contending with a glut of 5.56 billion square feet of unused office space, and that number is expected to grow to 5.68 billion square feet by 2030. With those numbers in mind, Cushman & Wakefield predicts that the overall vacancy level in the U.S. will be a 55 percent increase than what was observed at the end of 2019 before the virus wrecked the commercial real estate market.

A high number of office vacancies can quickly compound into bad news for the economy, which is something we’re already seeing unfold. Vacant offices cause financial strain for landlords who still have to pay for maintenance and other expenses associated with the building. Then there’s the spiraling effect that empty or almost-empty office buildings can have on property values in the surrounding area. A large number of vacant office buildings can make an area appear less desirable to potential investors and buyers, leading to decreased property values and a slowdown in new development. And having large assets like office buildings lose income as well as overall value is especially worrisome with the current macroeconomic woes of rising interest rates and looming bank failures.

Meanwhile, the U.S. suffers from a major shortfall in apartment units that must be addressed. Last year, the National Apartment Association and the National Multifamily Housing Council unveiled a joint report stating that the U.S. suffers from a deficit of 600,000 apartments, and that’s not even the worst part. The U.S. needs to build 4.3 million new units by 2035 just to meet projected demand. With offices in dire straits and a shortage of residential units, a growing roster of office owners, developers, and even some city governments are seeing an opportunity to reignite beleaguered downtown centers.

The idea of urban revival is at the core of the theory underlying office-to-residential conversions reviving troubled downtown areas. The basic idea is that by converting underutilized or obsolete office buildings into residential spaces, developers can bring new residents into the downtown area, increasing foot traffic, and creating demand for services and amenities. This, in turn, can attract new businesses and investment, creating a virtuous cycle of growth and development.

Playing house

Converting an office into a residential space certainly has appeal, especially for a place like New York City. NYC has an excess of office space, some of which is operationally outmoded. This is all while the city urgently needs more housing, the perfect storm for office to residential conversion projects to thrive. At least, that’s what NYC Mayor Eric Adams seems to believe. Earlier this year, Adams announced a plan to “transform” Manhattan’s underperforming business district by turning thousands of empty offices into apartments. The plan, which is still in its early stages, includes recommendations for streamlining the conversion process (like making sweeping adjustments to zoning rules to better allow for conversion projects to take place), providing incentives for developers, and prioritizing the conversion of buildings in high-need areas. The goal, according to Adams, is to create 10,000 affordable housing units by 2024 through the conversion of at least 250 office buildings.

This would not be the first time NYC has created initiatives around office-to-residential conversion projects. Adams’ strategy has been compared to the 20-year transformation of Manhattan’s Financial District. As developers converted offices into houses, the district’s population has almost doubled since 2001. Zoning amendments and tax benefits hastened those changes. One of the most notable examples of this trend is the conversion of 20 Exchange Place, a former office building transformed into a luxury apartment complex. The building was originally built in 1931 and served as the headquarters for the City Bank-Farmers Trust Company. After the terrorist attacks on 9/11, the building’s occupancy rate took a nose dive. 20 Exchange Place was eventually sold to a group of investors who saw an opportunity to convert the property into residential units. Today, the building features a mix of studios, one and two bedroom apartments, and penthouses, complete with amenities like a fitness center, rooftop lounge, and 24-hour doorman service. 

There are a myriad of other conversion success stories in NYC, one of the most recent being the conversion of One Wall Street, a historic office building in New York City, into a residential property by real estate developer Harry Macklowe. The project made headlines for being the largest office-to-residential conversion in New York City’s history, costing an eye-gouging $1.5 billion to renovate the structure inside while building 1.1 million square feet of new construction. One Wall Street’s conversion is conveniently debuting during one of the biggest pushes for office-to-residential conversions. However, the One Wall Street project underscores an inconvenient truth: these projects aren’t an easy undertaking. 

Convert etiquette

Converting office buildings into residential units is a painstaking process that involves some serious architectural gymnastics. When it comes to actually repurposing an office space into a residence, floorplates are the first problem. Office buildings tend to have large, open floor plates (you can thank the open-concept craze for that) that are not conducive to residential living. Unlike office spaces, apartments require separate bedrooms, kitchens, and living areas, among other features, which cannot be accommodated easily within a single large open floor plan. To convert these buildings into apartments, developers must divide these large spaces into smaller units, often requiring significant modifications to the structure and layout of the building.

Another major challenge of modifying office buildings into residential units is the difference in plumbing and mechanical systems. Office buildings are designed with very different layouts than residential buildings, which can result in costly and time-consuming modifications. For instance, office buildings often have large, centralized heating and cooling systems that are not suited for use in individual residential units. To convert an office building to a residential one, developers may need to install new heating and cooling systems for each unit, which can be expensive and require significant modifications to the building’s infrastructure. Plumbing needs also differ between commercial and residential buildings, so developers may need to install new pipes and fixtures for bathrooms and kitchens in each unit. These modifications can be a major hurdle for developers looking to convert office buildings to residential units. 

Windows are another pain point when it comes to office-to-residential conversions. Windows are a critical aspect of any residential unit, as they provide natural light and ventilation while ensuring privacy and insulation. However, the large windows that are typically found in office buildings may not be ideal for residential use. They may let in too much sunlight, making it difficult to maintain a comfortable temperature, or they may not provide sufficient insulation, leading to higher energy costs. Additionally, office windows are often designed to maximize city views, but residential units require more privacy. As a result, developers may need to install new windows that are better suited to the needs of residents. 

The window problem is such a hassle to deal with that policymakers are considering rewriting local building codes to make the conversion process more manageable. Mayor Adams is floating a controversial idea to tweak a section in NYC’s Housing Maintenance Code that mandates that bedrooms must be equipped with windows. Since the latter half of the 19th century, when NYC started enacting new laws for its crowded, frequently deadly tenement dwellings, windows have been legally required in every NYC bedroom to ensure adequate natural light, ventilation, and egress in case of an emergency. However, Adams is suggesting that the law be removed to streamline the office-to-residential conversion processes, much to many residents’ dismay. As of now, Adam’s suggestion is merely a musing, but time will tell if his proposal gains any traction.

Is converting the only way to go?

Obsolete or underutilized buildings can indeed be a drain on the local economy, but while office-to-residential conversions offer a promising strategy for urban revitalization, they’re not a panacea for all of the challenges that beleaguered downtown centers face. First of all, not every building is suitable for conversion. A survey in San Francisco showed that only 49 properties in the city’s downtown were good candidates for residential conversion. In another evaluation Soilverstein Properties found that of Manhattans nearly 2,500 office buildings, only 323 were feasible to convert. 

A building’s physical characteristics, such as age, size, layout, and structural soundness, usually determine whether or not a conversion will be a viable option to begin with. Most of the buildings up for conversion consideration are older, less competitive assets with creaky infrastructure, and the older the building, the higher the price tag to convert. Outdated office buildings usually are not up to current buildings code and so will take a lot more modification than just more walls and bathrooms. Modifying an older building to a swanky multifamily asset means that developers have to tiptoe around a regulatory minefield, so conversions will only happen if developers deem it more cost-effective to step on those mines over tearing the whole building down.

While the spotlight on office-to-residential conversions is the brightest it’s ever been, the reality is that half-empty office buildings may not be a bad thing for office owners in the long run (although it definitely stings the property owner in the short term). Lowered office occupancy does not necessarily spell doom for downtown economies. Though hybrid work trends have made it so employees aren’t in the office every single weekday, people are still coming to the office. Plus, occupiers are still figuring out their space needs for a post-pandemic world, and since office vacancies are at a staggering high, rents are ultimately down. If the office-to-residential trends accelerate so quickly that they completely reconfigure urban downtowns, smaller firms may be priced out of the workspace, prompting them to ultimately throw in the towel and lean into fully remote operations. However, if we push out smaller enterprises, the downtown economy will have an over reliance on large businesses, which makes the downtown area more susceptible to widespread layoffs during a crisis, ultimately putting office owners right back into an uneasy office market. 

The COVID-19 pandemic has decreased demand for office space and caused a surge in office vacancies, leading many looking to office-to-residential conversions as a way to reposition empty buildings. Developers and investors are repurposing these buildings into residential units to reignite downtown city centers but the conversion process is not easy. Even with the success stories of new multifamily buildings being carved out of the carcusses of unused offices, conversion will not be enough to reinvigorate downtowns across the country. In the end, we will have to either tear down and rebuild empty buildings, or find ways to bring workers back to the office—on their terms of course.