This is week two of our office conversion series and today we discuss office to multifamily conversions. Right off, we count over 20 prime office sites in Metro Phoenix that have been developed as multifamily in the last decade. This site stealing is not new. The relatively new thing is developers taking existing office buildings and retrofitting them to multifamily complexes. We have discussed this in previous C2 Voices here and here.
While selling office land to multifamily developers has been proven possible, conversions of existing buildings are a different matter. There is a lot of hype for this conversion scenario but the reality will fall short of the buzz (in our opinion). Conversions are filled with challenges such as construction complexities, time to convert, and rezoning. While this can be a viable option for some office space, it will require a lot of expertise, time, and money to pull it off.
– We will continue to see opportunities to help with the ongoing housing demand.
– When these conversions sell, the returns have been very lucrative.
– The numbers work, given the declining value of office buildings today.
– Rezoning can be time-consuming and expensive.
-It takes a good amount of time to do the actual conversion (taking the building to shell and rebuilding).
– Markets change and time can kill all deals.
– There are not as many office buildings that have quality construction and convertible floorplates as you would think.
The article below my signature details more examples, but here are a few more links if you are interested in this topic:
— Multifamily Developers Turn Some Dead Office Space into Apartments
— Converting office buildings to apartments
— Phoenix could soon capitalize on office-to-apartment conversions
— Phoenix midtown tower could transform into ‘urban resort oasis’
— Turning Empty Offices Into Apartments is Getting Even Harder
Here are my takeaways:
1. Challenges of Conversion: The time to convert is a lengthy process, which includes rezoning, re-designing, and re-building. Additionally, these conversions are expensive because you are taking the office and breaking it down to the shell to rebuild. The plumbing alone is pricey. Changing market vacancy rates/rental incomes will vary widely over the 2-3 years it takes to do the conversion making this risky. Here is a tale in our own market at Central & Camelback: One Camelback saga: Stakeholders jockey for position as development careens toward auction sale
2. Optimal Prospects in Specific Markets: Older and more obsolete mid & high-rise office buildings, with higher vacancy rates, have the most potential for profitable transformation into rental units. BUT only if the floorplans work. Achieving floorplate layouts with natural light, for each apartment can be a huge challenge.
However, despite the challenges, it has been done. Here are a few examples:
1. Cordell Place in Bethesda, Maryland. Converted office into permanent supportive housing for the homeless. This conversion can change the nature of the submarket creating additional stress on the market.
2. WeBuild Res located in our very own Valley of the Sun. They have started to convert three older office buildings into a new multi-family apartment complex that will be called Northern Apartments. These office buildings date back to the 1980s and were obsolete as office. Click the link here to read more.
One real interest of mine is converting offices into workplace housing for service workers so they can live within close proximity of where they work. I see this as very interesting but very challenging. The Federal Government just opened $45 million in federal funds for office to home conversions to try to encourage housing in close proximity to public transit. Read more by clicking the link here.
We will watch with interest to see how many of these multifamily conversions happen over the next market cycle or two.
Making the Math Work: Office-to-Multifamily Conversions
April 27, 2022
While uncertainty still clouds the outlook for office space in many of the largest cities in the U.S., demand for housing remains significantly higher than supply. Housing shortage estimates range from three to four million units, so empty offices seem like a natural source of space that could be converted to multifamily housing. But office-to-housing conversions are not as simple as they appear.
A $4.1 million investment from Montgomery County, Maryland assisted re-development of Octave 1320, an office building close to Silver Spring, Maryland’s transit station. Octave 1320 was converted to affordable efficiency condos for first-time homebuyers. The developer said construction time was reduced to 12 to 13 months from 18 to 24 months with an office conversion instead of ground-up construction.
“In cities with inclusionary zoning and government incentives, including Low Income Housing Tax Credits, developers can find ways to convert offices to affordable housing,” says Cororaton. “That can be easier when you can find the right Class B office for the project.