What Cleveland Can Teach Us About Office Conversions

Concern about the future of the office market and to what degree properties might lose even more value than they have is understandable. Many owners and investors will ultimately take the hit so long as companies don’t see the need to have everyone all the time at their offices. Or can’t compel enough employees to the same view.

That is the source of interest in office conversions. Take those buildings that are largely or fully empty and turn it into something else. Seems reasonable. But Carly Pendergast at Trepp’s CRE Direct notes “the removal of empty space still might not be enough to combat rising vacancy rates and companies giving back their office space.”

First, the numbers. CBRE says that Cleveland has the first or second highest percentages of office stock targeted for conversion, depending on how it’s measured. By percentage, it was at the top by the third quarter in 2023 at 11%, or 3.5 million square feet planned or in progress across eight projects. Boston had the largest total with 6.1 million square feet. Of the top 10 markets for office conversions, seven had a vacancy rate higher than the national average of 18.2%. Boston and San Francisco were the only two with zero office-to-multifamily conversions.

Trepp notes that in 2023, Cleveland had 522,569 square feet of negative office absorption and 1.43 million square feet of leasing activity. In 2022, there was 1.46 million square feet of negative absorption and 3.46 million square feet of leasing. And according to Cushman & Wakefield, the office inventory in the fourth quarter of 2023 was 90.8 million square feet, down 42.3% from the 157.4 million square feet at the beginning of the year.

But as CBRE also said: “Conversions alone cannot resolve the challenges facing the U.S. office market. As long as interest rates remain high, fewer projects will get going. Cities that have financial incentive plans to transition obsolete buildings into newer and better uses will help transform older office districts into vibrant mixed-use centers that occupiers and consumers desire.”

Part of that may be the financing, as CBRE explained. In a time where interest rates remain high, someone has to make it fiscally viable to undertake a project.

Another part owes to what multiple sources have told GlobeSt.com over the last few years. Not all buildings are candidates for conversion. They may lack the architectural layout, structural flexibility, adequate utilities infrastructure, parking, location, or any other factor necessary to success of the final product.

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