Adaptive Reuse Surges As Older Buildings Are Rebirthed Into New Uses

Adaptive reuse has become a rallying cry for city planners frustrated by the low occupancy rates of office buildings in their cities’ downtowns. Recognizing that remote work has changed, probably permanently, the character of their cityscape, they are seeking solutions on what to do about these near empty buildings. Adaptive reuse – that is, converting these often older office buildings into residential properties – has become the answer. 

The years from 2019 to 2020 were peak times for adaptive reuse, according to Yardi Matrix’s RentCafé July report from Andrea Neculae, with a record 6,874 units office conversions in 2020. The next two years, however, did not reflect the same number of transactions, and 2022 experienced a slowdown for a second consecutive year with only 10,090 apartments retrofitted—12% fewer than the prior year and 25% less than in 2020. 

But there still were a healthy number of overhauls, and what’s more is that interest remains for what’s anticipated to be another surge in coming years with a 63% increase projected. To date 122,000 rental apartments are undergoing conversion, 45,000 of which represent office repurposing. Former hotels have also been transformed into apartments with a record-breaking 43% remade. Their numbers registered a five-year record in part due to a drop in travel at the beginning of the pandemics San Francisco and New York were cited as cities where occupancy declined, opening the door for redevelopment.

The office segment poses a big question mark. So many empty or less full buildings have been pointed to as a ready source of residential housing, but the transformations are not always a slam dunk because of the existing floor plates and fenestration that can’t easily and affordably always be changed and the big unknown if remote and hybrid work will become permanent or are just temporary solutions.

Of late, these conversions have focused on smaller, older properties and had limited effects, said Doug Ressler, Senior Analyst & Manager of Business Intelligence at Yardi Matrix. “Based on the latest research by CBRE, the conversion of office spaces into multifamily units will primarily be restricted to smaller, older office properties due to factors such as construction costs and regulations related to residential construction,” he said.

What bodes well for such projects, according to Ressler? “Market conditions that favor such projects include significant multifamily demand or government incentives, specifically aimed at promoting historic restoration efforts, the same source shows,” he said, adding, “Construction costs and regulations on residential construction will continues to limit conversions to smaller, older office properties—whose floor plates make for an easier conversion—in markets with either high multifamily demand or government incentives aimed at historic restoration.”

The trend of adaptive reuse apartment conversions occurred most in Los Angeles where the city’s chapter of the American Institute of Architects (AIA) pushed to advance the process this year, especially in its downtown and through its 2040 Community Plan approved by the City Council. After LA, cities that followed were Kissimmee, Fla., where most projects were former hotels; then, Alexandria, Va., which excelled in office conversions; Baltimore and Saint Louis. Some cities that were once bright spots in this phenomenon no longer are such as Washington, D.C., Philadelphia and Chicago. But other cities like Denver showed promise with buildings there becoming homes and studios for artists in various professions.

Factories offer promise, too, though they showed a slowdown in 2022 with only 1,241 emerging from this type of transformation, which was a 49% drop. One glitch in this work is that factories require special permits to convert them to housing, a big obstacle, RentCafé reported.

The future of this trend hinges on other challenges and what-ifs, Ressler said. from leveraging public assets to public financing tool, new legislative authorities, funding and more solutions from the private sector such as corporate funding and deeper alignment with traditional multifamily housing developers and investors.