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There’s a housing shortage and an office glut. So why are there only 217 U.S. office-to-resi conversion projects in the pipeline?



In a post-pandemic world marked by a significant shift towards hybrid and remote work, offices are becoming increasingly vacant. In fact, as much as 330 million square feet of U.S. office space could become vacant by 2030, according to an early 2023 report by global real estate firm Cushman & Wakefield. What’s more is an extra 740 million square feet of office space could be vacant from “natural causes” by 2030, Cushman & Wakefield adds, which leaves about 1 billion square feet of unused office space in the U.S. alone. That’s nearly 1.5 times the amount from the end of 2019 right before the pandemic began, according to Cushman & Wakefield.

“It’s not a secret that [office] vacancy is at a 30-year high right now. It’s around 18%,” Julie Whelan, CBRE’s global head of occupier research, tells Fortune. “So the question is is that vacancy going to stay there for the long term? Or is it going to recede back as the economy gets better, and occupiers start to lease space again?”

One seemingly viable solution for the glut in office space is turning the unused properties into multi-family residential units. This reimagining and reuse of space through office-to-resi conversions  could help to ease the undersupply of residential units in the U.S.—which is “structurally short” an estimated 2 million housing units, according to Morgan Stanley. “Aggressive” projections from Morgan Stanley even show that the U.S. could be underbuilt by 6 million units.

CBRE, Deloitte, and other companies studying office-to-resi conversions predict that these types of projects will continue into the future—especially as more cities start offering incentive programs such as tax abatement, historical tax credits, and the like. A study released by Delitte in late July found that between 2016 and 2021, there were, on average, about 30 such projects per year, totaling just under 200 office-to-resi projects. 

But as many Americans continue to work from home or under a hybrid model, only 217 conversion projects are in the immediate pipeline for completion, the Deloitte study shows. 

“If you look at what has been converted since 2016 and what is even planned to be converted through 2025, that’s only 90 million square feet,” Whelan says. “So when I say that the conversions that have happened and that are underway are really only a drop in the bucket with the vacancy that’s out there, that’s what I mean.”

What’s more is that Deloitte predicts that these projects could become profitable during the next five years. The consulting giant estimates that about 14,700 affordable units in central business districts (the commercial and business center of a city) could be added by 2030. But what will it take to bring these projects to life? More office-to-housing incentives, experts agree. 

“You really have to have the right incentives that the cities are instilling to help developers be able to financially make it work,” Whelan says. “If it’s done right and we find all of those factors that align, then converting an office building to multifamily can be a step in the right direction in helping to revitalize some of our city blocks that might be challenged right now.”

Several large cities have recently implemented incentives for office-to-residential conversion projects. Indeed, Boston this summer announced the launch of a pilot program offering tax incentives to convert underused downtown office buildings. Chicago, Washington, D.C., and California have also introduced programs to convert commercial space to residential units. 

At the end of 2021, Chicago’s La Salle Central Tax Increment Financing (TIF) district had a balance of $197 million in TIF financing to make available to developers for commercial-to-resi projects. Washington, D.C. announced a $2.5 million, 20-year tax abatement program for owners who added at least 10 housing units, and California set aside $400 million in incentives for office-to-resi conversion projects. Some of the timelines on these projects, however, are tight, which could create a challenge for would-be developers.

“It’s probably just going to apply to projects that are very close to occurring,” Bobby Fijan, a real estate developer and cofounder of Form Developers, a property technology company, previously told Fortune in an interview about office-to-resi conversions. “It might tip a few projects into happening, but it doesn’t seem like there’s enough time for it to affect lots of other things since it’s just the initial pilot program,” he adds, specifically talking about the new Boston incentive program.

Aside from residential conversion projects, vacant office spaces could also be repurposed into different commercial spaces, Whelan says, including hotels, mixed-use buildings, and could even be scrapped and used for city green spaces. 

“Ultimately, the goal would be to not just look at it from an asset-by-asset perspective, but to really look at the urban plan,” she adds. “You have some cities around the U.S. that are really taking that more holistic approach to it by looking at concentrated vacancy in one area and bringing an incentive to that area to redevelop it.”

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