One of the craziest office building trends I have witnessed in the past decade is now accelerating. The trend: Office land and office buildings are being built out for other uses. Office used to be the highest and best use….not anymore.
Years ago, I wrote this narrative on apartments taking office sites. Today, developers are:
–Rezoning office land into multifamily.
–Converting existing office buildings into apartments. See below for more on this new trend. We actually participated in this by selling an office building last year that is now being converted to multifamily.
–Finally, in Arizona, we are seeing office land sites going to industrial developers. Industrial land values are now higher than commercial office.
Clearly, office is not the favored segment today. We’ll have to wait and see what the future brings. Stay tuned.
A record number of old office buildings were turned into apartments this year
By: Jennifer Liu
November 24, 2021
Real estate developers want to make offices feel more like home — literally. Throughout 2020 and 2021, 41% of apartment conversions, or taking an existing non-residential building and turning it into apartments, have come out of old office spaces, according to a report from the apartment-search site RentCafe.
That comes out to about 13,250 new rental units built out of ex-offices in the last two years. It’s a form of adaptive reuse, or repurposing an existing building for something new.
The numbers represent a trend spanning the last decade, says Brookings Metro fellow Tracy Hadden Loh, who researches commercial real estate. Businesses have dedicated less square-footage per worker for years, she tells CNBC Make It, as workplaces swap private offices for open floor plans. While employers consolidate their offices, building owners scramble for new tenants — sometimes, that means vying for residential occupants.
The trend could pick up as remote work takes off in the post-pandemic world, companies decrease their physical footprint even more and real estate developers have to figure out how to turn their spaces into something people will want to occupy.
Nearly two years into the pandemic, office vacancy rates remain high across many major U.S. cities, and nearly one-third of executives believe they’ll need less total office space in the next three years due to remote work, according to a PwC survey.
Already, former office spaces are expected to make up a quarter of converted apartments in 2022, which will add roughly 12,300 rental units to the market.
Office buildings offer another crucial benefit that make it attractive for a housing conversion: location.
Cities with big office markets tend to have less housing nearby, Loh explains; meanwhile, business districts are centrally located and highly accessible by design, making it lucrative real estate. Developers could be highly incentivized to turn expensive and unused office space into expensive and in-demand housing.
Overall, a record number of 20,100 apartment conversions are expected to be finished this year, coming to a total of 32,000 converted units since the beginning of the 2020, according to the RentCafe report and based on data from sister company Yardi Matrix, a commercial real estate research firm.
The practice of turning commercial spaces into rental housing has skyrocketed in the last decade, RentCafe notes, with just 5,300 apartments being converted in 2010. Hotels and factories were prime conversion spaces in the 2010s, though office conversions could be the next big trend in adaptive reuse through the 2020s.
Compared to demolition and new construction, adaptive reuse can have a lower environmental impact, cost less money, take less time to complete and address a number of housing affordability issues in some of the most congested and expensive cities across the U.S.
So far, Philadelphia and Washington, D.C., have converted the most new housing units from old buildings in 2020 and 2021, while Los Angeles and Cleveland have the most projects lined up beginning in 2022.