The Hard Reality of Converting an Office Into a Residence

Companies are trying their best to get their office workers to return to the office, at least a few days a week, with only middling success. Landlords are starting to face what many say is the inevitable: some buildings will simply stay empty. As they come to this reckoning, they turn to the oft-repeated mantra that these properties can be candidates for a residential conversion. 

The truth is, though, that not many are, according to a white paper by Northmarq.

The concept is good in theory, but it comes with several practical challenges, according to SVP Craig Tomlinson. Still, it is worth considering especially in view of the increasing office vacancies, now estimated by CoStar at 13.2% nationwide, with some markets showing even higher numbers. In addition, many companies are about to see leases expire in the coming few years, which will make the supply of office space grow more.

The challenges, though, are many.

For starters, to convert an office building into a condominium or apartment structure requires a different floor plan and systems. “Developers would have to almost completely demolish floor plans in order to accommodate residential preferences,” Tomlinson said.

Among these are three major transformations for a building’s plumbing, heating and air and natural light. Instead of restrooms in common areas on each floor, developers would need to add plumbing for each unit for individual toilets, showers, sinks and dishwashers. Commercial HVAC ducting for a floor would have to be updated also for each unit, so residents can control their own thermostats. Windows represent a major difference, too, and access and ability to open them would be essential for residents and owners. As the report said, “no one wants to feel like they live in an office.”

But life outside the building is also key to attracting residents. There is a need for amenities such as grocery stores and other businesses that aren’t always found in commercial districts. The report says that already some building owners are working with developers to turn their commercial properties into residences, supported by nearby retail or mixed-use options such as gyms, restaurants, hair salons and more.

How many buildings might make a good fit? In Washington, D.C., experts estimate that only 5% of office buildings might work for conversion. In New York, the percentage drops down to 3%. Moreover, the cost can be staggering. A recent New York Times article about converting these buildings could cost between $400 and $500 per usable square foot.

But despite challenges, help is coming from governments offering grant programs, Tomlinson said. Multiple cities and states are working to provide grants to investors. In California, lawmakers have approved $500 million in incentives for commercial-to-residential conversions, including $105 million to convert spaces to affordable housing units. In Wisconsin, legislators approved a plan to grant interest-free loans of up to $1 million to developers who will convert empty office buildings and big-box retail stores into affordable housing. Chicago also has seen city leaders plan to offer $197 million in tax-increment financing to developers who can convert vacant or underutilized office buildings.

The conversion possibilities may not work for every asset, but it’s a “high-potential opportunity,” Tomlinson said, which has the support of essential players across the country–including governments, residents and lenders. The bottom line is that office owners should consider evaluating the option for their most viable contenders.