When an Office is Empty, is it an Apartment? The Pros and Cons of Office-to-Multifamily Conversions

Here’s a riddle you’ve probably heard: “When is a door not a door?” The answer? “When it’s ajar.” Queue applause.

Now, here’s an even better riddle. “When is an office space, not an office space?” The answer, according to municipalities and urban centers all across the U.S., may very well be “when it’s empty.”

The COVID-19 pandemic—and the explosive rise of hybrid work models it engendered—have left many commercial office spaces vacant and fiscally flailing, especially in major cities. As of Q4 of last year, a Cushman and Wakefield study reported that nearly one-fifth of previously leveraged office spaces in the U.S. were vacant, with cities like Los Angeles, Houston, and Cincinnati inflicting an outsized impact on that stat—with vacancy rates hovering around 25%. While the issue has eased up somewhat thanks to a meaningful rise in return-to-office policies, there is still an unimaginably HUGE number of commercial offices doing nothing but keeping the rain off the carpets.

Which is where office-to-multifamily (OTM) conversions are making their play. Fundamentally, OTM is a strategy whereby empty office spaces are transformed into multifamily housing, a way of shoring up the housing shortage without the negative environmental impacts of major new construction projects. It’s an approach that is as promising as it is relentlessly complicated, so here’s the rub.

Forever Niche or Starting to Snowball: What’s Driving OTM Demand?

Cities across the U.S. have struggled to meet housing demands for years, and many urban centers now see underutilized office spaces as an opportunity to address the gap. In a previous article, we discussed Massachusetts’ Green Bank initiative which seeks to support environmentally friendly projects, including OTM conversions. However, as of now, there’s no widespread consensus or framework for OTM conversions in the U.S., and industry experts are pretty split on their current and future viability.

For instance, commercial real estate leader CBRE Group initially deemed OTM conversions a relatively niche and only marginally viable option, representing about 1% of multifamily deliveries over the past 20 years. However, ResiClub Analytics recently reported a massive 357% increase in the OTM pipeline within just three years, suggesting growing interest and potential viability for these conversions. 

Understanding the landscapes – some context. While CBRE’s findings suggest minimal impact from OTM conversions over the past two decades (their growth falls fairly well in line with historical industry rates), the larger shifts we’ve seen post-pandemic are largely offset by older, more reliable periods where office vacancies were low. On the other hand, while ResiClub’s meteoric growth may seem bullish for OTM, the fact that they’ve historically only represented a tiny fraction of the market means that even modest absolute growth appears as a significant percentage change. Both reports are technically accurate, but each reflects different aspects of the story.

Vacancy Rates and Regional Differences in OTM Viability

The high vacancy rate of office spaces—up to 17% by the end of 2022, a figure that hasn’t been seen in 31 years—is central to the conversation. NAIOP forecasts that as interest rates stabilize and recession fears ease, demand for office space may rebound, which could reduce the pool of buildings available for OTM projects. This looming shift implies that developers interested in OTMs may face dwindling opportunities if office vacancies begin to decline.

OTM conversion rates differ widely depending on the metropolitan area. Data shows that cities like Washington, D.C., have almost 6,000 units in the pipeline, while Charlotte, NC, has fewer than 900. Philadelphia’s OTM conversion growth stands at 136%, while Cleveland saw a decrease of 10%. These disparities underscore that OTM conversions are highly localized, influenced by factors like the age and configuration of available buildings, local housing demand, and government support. The opportunity for successful OTM conversions varies greatly from city to city, making a one-size-fits-all approach impractical.

The Financial and Physical Hurdles

Several significant financial and physical barriers limit the widespread adoption of OTM conversions:

1. Financial Costs: Office buildings remain costly, even in high-vacancy areas. Goldman Sachs estimates that in cities where remote work is most prevalent, office prices would need to drop by nearly 50% to make OTMs financially feasible. NAIOP’s forecast, however, suggests that the office market will stabilize, making such drastic price reductions unlikely.
2. Building Code Constraints: The requirements for residential buildings differ from those of office spaces. For instance, residential codes often mandate windows of a certain size in bedrooms, which may be unfeasible to retrofit in office structures. Furthermore, large office buildings often have extensive internal space with no access to natural light, limiting their potential as livable residential spaces.
3. Infrastructure Challenges: Converting offices to residential units involves adding kitchens, bathrooms, HVAC, and electrical systems—features not readily available in most office buildings, which may only have a few restrooms per floor. The cost and logistical complexity of reconfiguring office spaces to meet residential standards can be prohibitive.

Notably, CBRE’s research shows that most successful OTM conversions involve smaller and older buildings with simpler floor plans. The median construction year for converted buildings is 1941, compared to 1989 for all office buildings, and converted buildings typically have smaller floor plates, averaging 13,138 square feet, as opposed to 19,750 square feet in standard office buildings.

The “Goldilocks” Challenge of OTM Conversions

The concept of OTM conversions offers a promising solution to the housing crisis, but it’s not a silver bullet. Only a subset of office buildings is truly suitable for conversion, given the financial, regulatory, and logistical hurdles involved. For multifamily developers, OTM conversions may represent an opportunity, but one that requires finding the right building, in the right location, at the right price—with the necessary governmental support and financial backing to make the project viable.

For property managers and developers exploring OTM conversions, understanding the potential impact of utility costs on return on investment (ROI) is critical. Conservice can help analyze these variables, providing insights and guidance to ensure that developers have a clear view of the financial implications of these conversions.

In the evolving world of real estate, the OTM trend represents an intriguing but challenging path forward, one that can potentially alleviate housing shortages and repurpose empty office spaces—but only under the right conditions. To learn more about the potential of OTMs in your area and how utility management can play a role in your project’s success, contact Conservice.