Can empty office space fix the housing shortage?
Empty office space is finally being put to use across America’s major cities.
According to the apartment listing website RentCafe, 55,300 office spaces have been scheduled for conversion to apartments as of 2024—up from just 12,100 in 2021.
The nearly five-fold increase is led by Washington, D.C., where 5,820 units have been scheduled for conversion.
New York is a close second at 5,215 units, followed by Dallas at 3,163. Chicago (2,822 units) and Los Angeles (2,442 units) round out the top five cities.
What do these cities have in common? Their downtown cores were once bustling with white-collar workers until Covid lockdowns sent them home. This kick-started the remote work boom, which has proven sticky.
While several employers have called their workers back into the office, a large portion continue to work from home.
According to data from The Wall Street Journal, America had nearly 1 billion square feet of empty office space in 2023—the highest on record.
All that unused space poses a serious risk to banks, which are sitting on $150 billion in office mortgage debt set to mature this year, according to the RentCafe report.
“As residential space demand surges, developers are leaping at the chance to repurpose these aging giants,” the report said.
While conversion projects are growing in popularity, transforming cubicles into homes has always been difficult. And it’s seemingly getting harder by the day.
Commercial to residential conversion: Not an easy feat
For starters, not every office building is a good candidate for conversion. According to CoStar Group, ideal candidates are offices built in 1980 or later that measure more than 100,000 square feet and are at least 50% vacant.
However, less than 1% of office space in major cities meets these criteria, the commercial developer said.
The other problem is convincing investors to invest in rental units instead of condo properties that can be sold. According to NerdWallet, rent prices are down 16% from their peak nearly two years ago, so the investment opportunity has become less appealing.
As Creditnews recently reported, it's become much harder and more expensive to take out a loan for construction and land development projects lately—making it harder for developers to secure financing.
“That can kill the project,” Steven Paynter, a principal at architecture company Gensler, told The Wall Street Journal. “It adds a huge amount of cost to the project,” he said, referring to higher interest rates.
Conversions become even more complicated for older buildings, where developers often run into environmental issues such as asbestos.
“It’s like building a ship inside of a bottle,” said Trevor Martinez, a developer at the Minnesota-based builder Sherman Associates.
Finally, there’s no formula for turning office space into housing, as “every project has to reinvent the wheel,” making it “much harder than building from scratch,” said Brett Theodos, a senior fellow with the Metropolitan Housing and Communities Policy Center.
Despite these challenges, the RentCafe report shows developers are willing to invest strategically in certain conversion projects. And for good reason.
How many homes does the U.S. need?
Depending on who you ask, America’s housing shortage ranges from 3.2 million to 6.5 million units. A lack of supply makes it harder for people to put an affordable roof over their heads, which affects both the rental and purchase markets.
While housing starts increased at the end of 2023, they remain chronically below demand.
“American housing demand is permanently higher than before the pandemic since people are spending more time at home,” said Bill Adams, chief economist at Comerica Bank.
He expects supply to improve as interest rates drop, but that could take a few years to materialize, as real estate projects can take anywhere from seven months (in the case of single-family homes) to 15 months (in the case of apartment buildings) to complete.
While office conversions certainly help, experts say they don’t provide that much additional supply in the long run.
“I don’t expect residential conversions to be game-changers to office vacancy rates or apartment shortages in major cities so much that rents drop,” Theodos told CNN.
“On the other hand, when you add 600, 800 units through conversions over a few years in a mid-sized city, it isn’t nothing,” he explained.