Understanding the Pros and Cons of Office-to-Residential Conversion

The COVID-19 pandemic and the ongoing popularity of remote work has put office building owners in a difficult position. While certain assets have proved resilient - such as Class A office space rich in amenities - Class B and Class C office buildings remain in decline. As a result, many developers are looking for ways to reinvent or reuse the properties; to this end, office-to-residential conversions are the most clear course of action. Amid ongoing housing shortages, adapting unused office assets is an attractive prospect for teams looking to repurpose underutilized assets and municipalities looking to boost housing production. 

Understanding the pros and cons of an office-to-residential building conversion is key as you evaluate potential opportunities in the market and look to ensure challenges don’t derail your project timelines or budgets. From high upfront costs to zoning complications, you should be aware of the pitfalls these adaptive reuse projects can present for your team. However, upcoming shifts in zoning policy to encourage housing production and leveraging the right strategies or tools can make the obstacles more easily surmountable. 

Here are the pros and cons of doing an office-to-residential conversion, and what the trend may mean for your portfolio: 

The Pros of Office-to-Residential Conversion 

Pursuing an office-to-residential conversion can have major benefits for individual portfolios and help cities or states revitalize urban housing markets. Here are a few of the upsides of converting underutilized office space into high-density residential housing: 

Lower Building Costs 

Depending on the project, adaptive reuse can help lower building and construction costs. You can potentially save on demolition and construction materials, and often existing infrastructure can be repurposed, including electrical, plumbing, and heating or cooling systems. Since state and local governments are eager to address the housing crisis, you may also save through an expedited zoning or regulatory approvals process. 

Tax incentives, and other government funding opportunities, can also help offset building costs. For example, the Biden Administration’s Housing Supply Plan aims to provide federal funding for commercial to residential conversion projects. The Revitalizing Downtowns Act, introduced in January 2023, will also aim to set aside funds for developers willing to take on office-to-residential conversion projects. Developers should keep an eye on new funding opportunities as they look to add office-to-residential conversion projects to their portfolios. 

Residential in High-Demand Markets

Office buildings are often located in the core of metropolitan cities, meaning conversion projects present a unique opportunity to build residential assets in areas with strong demand. Depending on the asset, you may even be able to convert properties into mixed-use multifamily developments that diversify risk by combining asset classes. Evaluating the demand for residential units in a given area - and in the case of an urban core access to other necessities such as grocery stores - is an essential part of your due diligence process on a residential-to-office conversion project. 

Sustainability

Since conversions typically require fewer new materials than new construction, these projects have a lower carbon footprint and can help your firm meet Environmental, Social, and Governance (ESG) targets. You also have the opportunity to use funds saved on construction to retrofit properties with sustainable features, which can in turn make a property more desirable for future residents. In a recent survey on green living, 83% of residents reported believing that living in a green building would be beneficial for health, and 59% reported willingness to pay extra to live in a green or sustainable building. 

The Cons of Office-to-Residential Conversion 

While office-to-residential conversions may seem like a clear solution to revive struggling office assets and address housing shortages, the process is not without its challenges. Here are a few common obstacles that may arise over the course of one of these projects:

Zoning and Regulatory Obstacles

Zoning regulations dictate what the allowable uses are for a property in a given location. Rezoning or obtaining variances may be required before converting an office into residential space, and the permitting process can potentially slow down your construction timeline. Parking minimums or requirements can also present a challenge, as office lots may not offer the adequate parking necessary to hit minimums. Luckily, state and local governments looking to boost housing production have started to shift these policies, meaning the coming years could present even greater opportunity for conversion projects. 

Limited Design + Flexibility

Unlike new construction, developers need to work within the constraints of a building’s existing infrastructure on an office-to-residential conversion. Many office buildings have office-specific structural features that can make conversions difficult or costly, such as floor-to-ceiling columns, close column spacing, or large banks of elevators. These structural limitations can potentially limit how many units can be created, the kinds of amenities offered, or the amount of adaptable design space included in the building. 

Market Constraints

While commercial districts are often highly central, neighborhoods with a high-density of office buildings may be lacking vital amenities such as grocery stores or fitness centers. Conducting thorough market research that takes surrounding neighborhoods into account before committing to an office-to-residential conversion project can help you ensure space will be in high-demand after stabilization. Mixed-use developments that combine living, working, and play into one space can also help you overcome geographical market constraints. 

Office-to Residential Success Stories 

The movement to convert office to residential spaces has yielded many high-profile success stories. Los Angeles’ developers converted several downtown office towers into rental properties, helping address the city’s housing crisis and repurpose underutilized office buildings. For example, the former Texaco office in Koreatown was converted into a luxury residential building known as The Crosby, complete with amenities that include a pool, cabanas, fitness center, and karaoke room. 

The success of the Crosby and the resilience of remote work, have led other developers in the city to eye similar conversions. In March, a study identified around  2,300 unutilized office and hotel properties in Los Angeles County that could be converted into housing. If all underused buildings were converted into housing it could bring around 113,000 new units to market, about 9 to 14% of the new housing LA needs to produce over the next eight years to meet demand. The developers of the Crosby argue that although upfront costs are high, the projects still come in at a lower price point than new buildings, and moving heating and cooling commonly found in office basements to climate controlled roof units allows developers to add on amenities such as fitness centers or recreational rooms. 

Other high-demand markets across the United States are also beginning to convert unused office space into new units. In New York, the owners of 25 Water Street, otherwise known as the Daily News Building, are converting the 22-story office space into 1,300 new units of housing. Even though the building will require significant renovations, it’s still faster than a ground-up project and is expected to be completed in 2024. The Pacific, a luxury condominium project located in San Francisco’s Pacific Heights neighborhood, is housed in what used to be a dental school built in the 1960s. 

Leveraging Technology to Facilitate the Development Process 

Leveraging modern real estate development software can help your firm bring complex office-to-residential conversion projects to market faster and avoid potential setbacks over the project’s lifecycle. Northspyre’s purpose-built, single software solution is designed to reduce manual data entry, increase productivity, and maximize your returns from pre-development to project completion. The platform makes it simple to manage administrative tasks like data uploads and document management across your entire portfolio. The software also proactively identifies opportunities in your budget to save money and eliminate overspending, and flags potential concerns so you can address them before things get out of hand. 

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