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Major Trend of Converting Commercial Buildings to Residential Use: What Investors Need to Know

Updated: Jul 5

Nationwide Trend of Converting Offices to Homes Grows

As remote work leaves offices empty, cities are increasingly converting these spaces into residential units. According to RentCafe, "adaptive reuse" will create 151,000 new apartments this year, up from 122,000 last year, marking a 24% increase. This trend is vital for preventing financial losses for property owners and maintaining city tax revenues. A study by NYU Stern School of Business and Columbia University in November 2022 estimated a $664.1 billion drop in real estate asset values due to remote work.

Leading the Charge: New York and Los Angeles

New York and Los Angeles are at the forefront of this transformation, with many projects converting hotels into residential units and some repurposing office spaces, particularly in Manhattan. A few projects involve converting industrial buildings. The largest project in Manhattan, at 525 Lexington Avenue, now has 655 student apartments. Los Angeles plans 5,881 unit conversions this year, while Manhattan has 4,363.


Challenges and Benefits of Office Conversions

Office conversions are more complex due to structural modifications but are eco-friendly alternatives to demolition. Doug Ressler of Yardi Matrix noted that repurposing helps address rental unit shortages, especially where buildings are underused.


Economic and Social Benefits

Additional residential spaces increase tax revenue, create vibrant communities, and boost local businesses, enhancing urban environments. About 11% of U.S. office buildings are suitable for conversion, though costs can be high, requiring high-end outcomes to justify expenses. Gensler's study shows office conversions cost less than one-third of new construction. Developer incentives, like a 20% credit for conversion costs, could revitalize city centers and provide affordable housing.


Opportunities for Investors

For real estate investors, increased tax revenue benefits city services and stabilizes housing markets. More affordable housing inventory could reduce high prices and create balanced communities. In the long term, revitalized city centers could appreciate real estate values.


Urban Condo Investments

Investing in condos offers passive income opportunities. The National Association of Realtors reports a 5.4% median sales price increase for condos. Though urban condos may be more expensive, maintenance fees ensure well-maintained public areas and amenities, providing investors with appreciating assets and tax breaks.


Challenges with Condo Investments

Condos are often bought by overseas investors in cash deals, leading to many unoccupied units. However, JLL reports that converting office buildings for residential or other uses could be lucrative for commercial real estate investors.


Alternative Uses for Office Buildings

Potential alternative uses include industrial storage, data centers, hospitality, and student or senior housing. Financial hurdles may arise if office-specific investment funds are involved, but policymakers are simplifying conversion processes.


Value-Add Opportunities in Older Buildings

Raphaelle Bour of Work Dynamics suggests investors can acquire vacant office buildings, structure repurposing, and establish new operators, offering secure cash flow. This type of investment is in high demand, with large investors creating diversified funds.


Final Thoughts

Repurposing office buildings offers opportunities for both small and large investors. A healthy urban ecosystem ensures ample tenants, essential services, and rising housing values for small multifamily building

In previous post: "How to invest in real estate"

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