Office conversions hit new high. Here’s why.
Projects converting office towers to other uses — a buzz-generating solution to deal with empty office buildings that gained traction during the pandemic — have reached record levels, reports Andy Medici of The Business Journals.
Perhaps the most-talked-about version of this type of project is one that takes a disused office and converts it into housing. As of the start of the year, there were 90,300 units in different stages of development undergoing such a shift, according to a March report from RentCafe.
Why it matters
The Covid-19 pandemic prompted a sharp rise in remote work and a corporate reevaluation of office space, and high office vacancy has been a lasting legacy of those years. Conversion projects, while historically challenging, offer a source of demand — and an exit ramp — for owners saddled with buildings that are shedding value.
That’s particularly important as real estate loans come due, with more than $213 billion set to do so by the end of this year, said Doug Ressler, senior analyst and manager of business intelligence for Yardi Matrix — the parent company of RentCafe — in the report.
“When loans mature, borrowers need to either pay them off or refinance them,” Ressler said. “The problem is that many of these office buildings have lost significant value.”
Why it’s possible
Those declining office values are key for making conversion projects work. The needs of an apartment building (in particular, an exterior wall for every unit) and the cost of such projects have made conversions difficult in the past, even if they were conceptually appealing as a dual solution to housing supply and unused offices.
“What’s important is understanding what has actually changed,” said Sergii Starostin, CEO of co-living operator Outpost Group. “It’s not that conversions suddenly became easy or inherently profitable. They didn’t. What has shifted is pricing. Distressed office assets trading at steep discounts have effectively reset the basis, and that’s what’s unlocking deals today.”
At the same time, local financial incentives and favorable regulation can help boost conversions — benefits municipal authorities most favor in cities that heavily depend on office space for tax revenue.
Zooming in
The conversions depend on regional dynamics. Here’s how they look in some of the metros where our local reporters have covered the trend:
In Boston, officials expect the conversion trend to come for the larger, newer (as in, built in the 1980s) high-rises that make up much of the city’s downtown. Such towers have been in a difficult middle ground: too old to attract top-tier office tenants, yet too large to easily be converted into apartments.
In Nashville, Tennessee office-to-hotel projects have become a big part of the trend. Such efforts were uncommon before recent years, but a shaky office market, multiple distressed sales and a booming tourism industry have opened the door
In Milwaukee, local experts say the strategy has clear limits. Many older office buildings have floor plates, infrastructure and even locations that make residential conversions impractical or prohibitively expensive.
Source: “The National Observer: Office conversions surge as workplace dynamics shift“
