Article originally posted on CoStar on May 10, 2023

A third of older office building stock in some of the largest cities across the United States and Canada are considered ripe for conversion into apartments, potentially providing one way to revive urban vibrancy in cities where workers haven’t fully returned to the office.

Global real estate firm Avison Young identified 6,206 buildings across 10 U.S. cities that could provide an opportunity for conversion to multifamily. The buildings were built before 1990 and have floor sizes below 15,000 square feet.

Those are considered better suited for converting to apartments than buildings with large floors that are more difficult to carve up for living space. “No one wants to live in a tunnel,” Sheila Botting, president Avison Young’s professional services, Americas, told CoStar News.

Converting old office buildings to other uses, primarily apartments, has gained momentum over the past three years as office buildings emptied out as companies cut back on costs as the economy slows, some downtowns lose their appeal, businesses seek newer and more energy efficient buildings and some staffs shift to working from home or a hybrid model of coming in a few days a week.

As companies dump unneeded office space on the market, it drives up vacancy rates, particularly in older buildings. That’s why conversions in buildings decades old are going on in various parts of the country and some real executives say they expect more rather than less in coming years.

New York City, which is the largest U.S. office market at 975 million square feet, has the biggest stock of older buildings available at 1,698, according to Avison Young’s analysis. Los Angeles is second with 1,212 and Chicago third with 1,030.

There are challenges, with cost being one of the largest impediments to conversions. Office buildings tend to have large floor spaces, making them difficult to economically carve up for apartment units, a chief reason why Avison Young focused on buildings with less that 15,000 square-foot floors.

What’s more, the area where a building is located needs to be conducive for residences, with nearby stores and services, and there’s a risk involved for owners familiar with leasing offices trying to switch to residential, a different type of business.

Botting said not all 6,206 buildings may be converted, but 10% to 20% could be meaningful. “It has to be the right conditions locally,” she said.

Office use still hovers around an average of 50% across major cities, according to security technology firm Kastle Systems’ latest “Back to Work Barometer.” That has prompted more calls from downtown businesses across the country that rely on the daily foot traffic to bring workers back into the office.

Spending per worker each year dropped to $4,661 per year in New York, still the highest among the country’s largest metropolitan areas, according to a February report from WFH Research. Los Angeles was next at $4,200 and Washington, D.C., third with $4,051.

Last year, New York Mayor Eric Adams called on major employers to bring workers back because empty buildings were harming the city’s economic recovery, with fewer office staff meaning fewer customers for nearby restaurants, dry cleaners, stores and other businesses. Office usage, however, is still less than half, at 47.9%, according to Kastle data.

Rather than relying on people returning to the office, Botting said that a “mix of uses is becoming more powerful” for downtowns, which creates more opportunity beyond just daytime business. The idea with conversions is to mix residential living within blocks and blocks of office buildings, the “art of the possible,” she said.

Underused office buildings became targets for possible conversion to apartments, particularly in cities seeking more affordable housing options. New York, Boston, Washington, D.C., Pittsburgh and other major cities had sought to provide economic incentives. California is offering them statewide.

The number of conversions has risen considerably since 2016 but still represents a small fraction of the overall office space square footage in the country. A CBRE report last December showed 85 conversions underway this year, double those completed last year. In 2016, the number was at 24.

New York City is home to the largest conversion project in the country. Developers are converting a 1.1 million-square-foot office tower into 1,300 apartment units.