Revitalizing Vacant Offices Through Housing Conversions

Article originally posted on HERE on December 1, 2023

These projects are gaining momentum, but the market impact remains limited, according to the latest CommercialEdge report.

The potential conversion of vacant office spaces into housing has gained attention since the early days of the pandemic, reflecting the lasting changes in the relationship between offices and workers, according to the latest CommercialEdge office report. Although conversions are happening in various markets, their impact on the broader office and housing sectors is still limited. Examples include the Flatiron building in Manhattan being transformed into luxury condos, and similar projects in cities like Boston, Dallas, Washington, D.C., Los Angeles and Charlotte, N.C.

However, challenges persist and financial constraints, including the need for significant capital, further hinder widespread conversions. The White House has introduced a plan to support office conversions, but the extent of its impact remains uncertain. While the plan offers assistance through various programs, the absence of new funding raises questions about its effectiveness. Public support is crucial for the success of conversion projects, particularly in addressing challenges like zoning and preservation for older properties.

The national office vacancy rate stood at 17.8 percent at the end of October, accounting for a 150-basis-point increase when compared to the same time last year, CommercialEdge data shows. The markets with the highest increase in office vacancy on a year-over-year basis were Detroit (690 basis points over the year), Twin Cities (410 basis points), Seattle (400 basis points), San Diego (360 basis points), Denver (350 basis points), Charlotte (320 basis points) and San Francisco (310 basis points).

National full-service equivalent listing rates averaged $37.77 per square foot in October, decreasing by 40 basis points year-over-year and two cents less than the month prior. The highest increases were recorded in New Jersey (440 basis points year-over-year), Twin Cities (420 basis points), Atlanta (380 basis points), Philadelphia (330 basis points), Houston (310 basis points) and Denver (230 basis points).

The office-using employment sector added 4,000 new jobs in October, accounting for a 0.6 percent year-over-year growth. Employment in the professional and business services sector increased by 15,000 jobs during the month. In contrast, the information sector saw a decrease of 9,000 jobs and financial activities experienced a loss of 2,000 jobs.

Office demand continues decline

Nationwide, the under-construction pipeline totaled 98.7 million square feet of office space as of October, or 1.5 percent of total stock. In 2023, there has been a significant drop in demand for office space, leading to a slowdown in new development. Only 30.8 million square feet of new office space began construction this year, indicating that the total for the year is likely to be just over half of the construction starts observed in the previous two years.

At the end of October, Boston had some 13.7 million square feet of office space underway, accounting for 5.5 percent of total stock. Seattle came in second with nearly 6.6 million square feet underway, or 4.7 percent of stock. San Francisco had 6 million square feet of office space under construction (3.8 percent), while Austin’s pipeline featured 5.7 million square feet, or 6.2 percent of total stock. Office investment year-to-date in October totaled $27.9 billion, with properties trading at an average $196 per square foot.