Office Conversions to Fix the Housing Problem? The Fed Says It Probably Won't

In any discussion of housing shortages in a CRE context, there’s often the question of whether conversions could work? Look at all that office stock waiting for someone to show back up to work. How about we convert buildings, turn them into apartments, rent them out, and help alleviate two problems at once: a housing need and the desire to make old office stock pay off?

Chris Cunningham, a research economist at the Federal Reserve Bank of Atlanta, and Anthony Orlando, an assistant professor at CalPoly Pomona, recently wrote an analysis for the bank of whether office conversions could meet housing demand.

Even without the Fed, there are questions. Many office buildings will never lend themselves to straightforward conversions to apartments. If they aren’t rectangular with corridors opening to rooms on either side, of it there are columns everywhere, it can be difficult to make them work physically. Who’d want an apartment in the middle of a building without access to a window? And there are cities that don’t want conversions because they make more tax revenue off business use and they badly want the revenue.

But all that aside, they two made interesting points. For example, “From 2007 to 2019, SupplyTrack found that an average of 2,300 multifamily units were created monthly out of formerly office, warehouse, or industrial use. Historically, adaptation of existing structures is about 10 percent of newly supplied multifamily housing (in buildings with five or more units) or 3 percent of all housing units.”

Conversions would have to leap into the air to create enough additional housing stock to make a significant difference.

But a separate point was even more dissuading. A lot of work-from-home—which is driving the much of the office market, is hybrid work. “Hybrid work may raise productivity or increase the surplus to employees, but it may not actually free up much conventional office space,” the researchers write, because if people are still coming in, especially with large percentages of employees arriving in on certain days, companies continue to need space to put them. “[T]he hybrid model appears to be keeping widespread conversion of offices to rental on hold,” the two wrote. “In any case, it seems unlikely that office conversions will blunt rental increases anytime soon.”