Apartment Conversions Beat Out Ground-Up Construction

Article originally posted on HERE on November 21, 2022

A July 2022 report issued by the National Multifamily Housing Council (NMHC) and National Apartment Association (NAA) indicated that the United States needs 4.3 million additional apartments by 2035 to meet the expanding need for housing.

One key to this shortage is increased construction. But  a recently published RentCafe article indicated that adaptive reuse apartment units are coming online faster than their ground-up-construction counterparts. Specifically, the number of adaptive reuse units coming online increased by 25% in 2020-2021, versus the 2018-2019 period. Meanwhile, construction deliveries increased just 10% during the same time period.

And where are these conversions coming from? Mainly office buildings. The RentCafe article explained that office-to-apartment conversions experienced a 43% jump from 2020-2021, versus 2018-2019. The RentCafe article said that Washington, DC and Chicago led the way in office-to-apartment conversions.

“Developers and building owners are now faced with the challenge of what to do with these stranded assets, while cities and communities seek to find the right balance of space,” according to Doug Ressler, Yardi Matrix’s Manager of Business Intelligence. Ressler told Connect CRE that issue like work-from-home increase, ESG guidelines and workers’ abilities to find affordable housing are also driving the conversion movement.

According to Yardi Matrix research, Class C office assets, those that are 20 years or older, tend to be prime candidates for office-to-apartment conversions. However, “not every vacant office building is well-suited for conversion to residential,” Ressler said. “Success needs to begin with the structural assessment on a given building for a variety of structures, and the resulting financial conditions.”

One model, developed by Stephen Paynter with Gensler, helps determine the viability of an office-to-residential conversion:

“As with any type of adaptive reuse project, local market conditions and a building’s existing design features determine whether it’s a suitable candidate for conversion, and which new use will provide the best return on investment,” Ressler said.

YardiMatrix data also reported a total of 77,100 adaptive reuse apartments in various stages of conversion. “Of these, some are already undergoing conversion and set to be completed in 2022 and later, while other projects are awaiting approval or are in the planning stages,” said the RentCafe article.