In recent years, the trend of converting office buildings into apartments has been growing due to changing work environments, increasing high demand for urban living space, and advancements in technology. Deliveries of residential buildings through adaptive reuse hit an all-time high in 2020-2021, outpacing the growth rate of new apartment completions by 10%.
However, conversion projects can be daunting, which is why real estate data and analytics play a crucial role in accelerating the office-to-multifamily conversion trend. And why an approach driven by information and evaluation is key to the success of development teams going forward.
Why Office-to-Apartment Conversions Are Gaining Momentum
According to Yardi Matrix, 11,090 adaptive reuse apartments reached completion in 2020-2021, an increase of 43% from 2018-2019. That remarkable spike is a byproduct of the conditions cultivated by the coronavirus pandemic. The abrupt adoption of remote work had a massive negative impact on the office building market. But the conditions that prompted a crisis for one asset class created an opportunity in another property type.
During the same time frame as the downturn of the office market, the annual growth of rental building completions via adaptive reuse exceeded new apartments by 15.6%. Yardi's data, going back to 2012, revealed that it only occurred once before, with a much smaller percentage difference. So, what led to the spike in office-to-apartment conversions?
The popularity of urban living spaces near employment and recreation hubs peaked in 2020. Demand for Class A city apartments reached a three-decade high, driving rent growth in over 100 top American metro markets. Unfortunately, geographical space constraints, labor shortages, and high materials costs hindered new residential living space inventory deliveries. But office-to-multifamily transformations provided a way forward.
Adaptive reuse living space conversions offer multiple advantages over ground-up projects, including greater cost-effectiveness and ROI. In addition, the adaptive reuse of existing properties allows for the preservation of urban fabric and lower environmental impact, qualities that appeal to municipal leaders.
Considering the office sector’s contemporary challenges, it’s clear why it led the way for apartment conversion activity in 2021, representing 40% of all transformations. The confluence of industry crisis also explains why 77,000 units are in the pipeline today. Reactive players always follow the market leaders.
Even so, adaptive reuse projects carry significant risk, especially for teams unfamiliar with the complexities of the process. Development teams should know that conversion projects aren’t immune to the problems affecting the wider industry. But those issues can be mitigated with an information and evaluation-focused approach.
How Real Estate Data and Analytics Are Accelerating the Conversion Trend
The most important benefit real estate data and analytics offer development teams is proactive insight, meaning a forward-looking perspective on the marketplace. Yardi’s in-depth research into the unprecedented acceleration of the office-to-apartment conversion trend details the positive impact of employing an analytical, data-driven strategy.
Building a methodology based on information and evaluation helps developers identify target markets for converted apartments and determine project feasibility based on the region’s rental trends and demographics. The insight provided by taking that approach can also help optimize unit mix and pricing. By leveraging institutional knowledge and market datasets, you can identify patterns and trends related to occupancy rates and the demand for different unit sizes.
With those insights, you can identify important opportunities, like property that can be purchased at the lowest possible price and converted for the highest returns.
In addition, data and analytics can improve the scheduling of a conversion project. Collecting and analyzing volumes of institutional knowledge and third-party data can indicate when demand for specific property types will crest. That way, you can go to investors with underwriting assumptions driven by data rather than gut instincts.
More importantly, profound insight enables operational agility amid massive changes to the landscape.
Last April, Moody’s Analytics asserted that office-to-apartment conversions would be “a fringe trend at best." It argued the office sector’s high property values and rents, along with a lack of buildings with characteristics favorable to adaptive reuse, make the emergence of a new secular trend unlikely. But the industry landscape changed greatly between the spring of 2022 and the winter of 2023.
CBCNY published a report last December contending that conversions could be a cost-effective solution to Manhattan’s current workplace building vacancy crisis, provided specific regulatory and fiscal policy changes are made. Multiple property executives at January’s World Economic Forum in Davos echoed CBCNY’s sentiment, stressing that transforming obsolete skyscrapers into residential buildings is an increasingly urgent need that public financial support can address. Leaders in Los Angeles, Chicago, and other major metros know the risks of having their urban cores dominated by what one Davos panelist called “eyesores.” That’s why they’re dedicating time and hundreds of millions to find remedies at the municipal level, including subsidies and other policy incentives.
All that is to say, the variables informing your decision-making can change significantly in a short amount of time.
Large real estate companies deploy their financial resources to stay informed and beat the competition. But even firms with large headcounts can miss major opportunities that only become apparent at a granular level. Manually processing large quantities of information is time-consuming and painstaking work. But automated platforms, equipped with real estate data and analytics features, can supply profound insight in near real-time. And the competitive real estate market, getting there before your rivals is an invaluable advantage.
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