WHITE PAPER

Adaptive Reuse: Converting Offices to Multi­Residential Family

Adaptive reuse of commercial office spaces to residential multifamily offers opportunities to ease some of the housing shortage in the US. These types of construction projects have many challenges, from zoning restrictions, financing, and also controlling construction costs. Construction costs specifically can have a disparate impact on whether an adaptive reuse project is possible, let alone successful. Therefore, flexibility during the construction process is vital to the success of an adaptive reuse project. Codes for plumbing and mechanical systems that support design versatility and science-based methods, such as the Uniform Codes, will be essential for controlling construction expenses.

Supply and demand. It is one of the most basic economic principles. As supply goes down, demand increases, which means prices increase. Unfortunately, in the United States, the supply of homes has reduced, and low supply is a key reason why housing affordability is at its lowest level in history1: Per Freddie Mac, the United States has 3.8 million fewer houses than it needs2. Furthermore, the pace of homebuilding has still not fully recovered from the subprime mortgage crisis of 2007 08 — basically a decade of underbuilding3. Meanwhile, recent interest rate hikes have made homeowners reluctant to sell, contributing to the supply crunch.4 As a result, almost half (46%) of renters are spending more than 30% of their income on rent, with 24% of renters spending more than 50% of income on rent5.

Unfortunately, in some parts of the United States this problem is only going to become worse. As an Arizona State University Kyl Center for Water Policy study explained6: “In June of 2023, the state of Arizona… [triggered] a mor‐ atorium on the issuance of permits for proposed subdivisions that would rely on local groundwater. This means that in some parts of Greater Phoenix, new housing subdivisions will not be permitted unless the developers secure water supplies other than local groundwater. Securing alternative supplies will likely require costly and complex investments in both water and infrastructure, raising concerns that new home development will be slowed, and the cost of new homes will increase, exacerbating local housing affordability problems.”

The United States is looking for solutions to improve housing affordability in many areas and revitalize urban cores or downtown cities. One of the potential answers presented is adaptive reuse in converting offices to residentialmulti family occupancy. This idea has been amplified post pandemic as many professionals now work remotely (“work from home” or WFH), reducing the amount of office space needed. With transportation costs increasing, the desire to commute into the office has also declined, with many employees even being willing to switch jobs to retain the option to WFH.

When compared to pre pandemic levels, the data show that the number of apartments resulting from adaptive reuse projects has grown more than the development of ground up new apartments. Adaptive reuse apartments have risen 25% in the past two years compared to pre pandemic levels. According to RentCafe73, between 2020 and 2021 the number of adaptive reuse of offices to apartment buildings was more than 11,000. The most common adaptive reuse conversions during this time were office conversions (40%), followed by factories (15.5%), hotels (12.8%) and warehouses (9%). Since 2022, it seems as if some of the adaptive reuse market has cooled, with the total number of office to apartment conversions declining by 12% from previous years8. Additionally, according to the McKinsey Global Institute report “Empty Spaces and Hybrid Places,”9 if all “excess office space was converted into residences, housing stock in ‘superstar’ cities would grow by less than 3 percent10.” But recent news seems to indicate that another increase in adaptive reuse conversions may be occurring. New York City has unveiled an ambitious plan11 to convert offices to housing. NYC especially has a challenge with empty offices12; 46 buildings are enrolled in the city’s Office Conversion Accelerator program13. And already, since the pandemic and Hurricane Sandy, Lower Manhattan has added about 25,000 residential units4. While there is no easy solution to the housing issue, Adaptive Reuse of Offices for Residential is definitely one of a number of viable options.

Even though adaptive reuse has many benefits (including historical preservation, sustainability by reducing carbon emissions, and lower construction costs) there are many challenges in converting a commercial office to a residential multifamily occupancy, from financial and zoning issues to the important details of complying with building codes and making the design and installation work. That is why looking at the view from the resident and their needs and wants years in the future, while keeping an eye on the policy and construction landscape in the foreground, is so important.

 

  1. https://money.com/housing­affordability­lowest­level­in­history
  2. https://www.freddiemac.com/perspectives/sam­khater/20210415­single­family­shortage
  3. https://www.axios.com/local/phoenix/2022/09/08/phoenix­needs­more­houses­apartments­demand
  4. https://www.investopedia.com/blame­surging­mortgage­rates­for­threadbare­for­sale­listings7198157#:~:text=Despite%20sky­high%20home%20prices%2C%20many%20wouldbe%20home%20sellers,of%20the%20Federal%20Reserve’s%20anti­inflation%20interest%20rate%20hikes.
  5. https://www.jchs.harvard.edu/americas­rental­housing­2022
  6. https://morrisoninstitute.asu.edu/sites/default/files/housing_affordability_and_groundwater.pdf
  7. https://www.rentcafe.com/blog/rental­market/market­snapshots/adaptive­reuse­apartments­2022/
  8. https://www.rentcafe.com/blog/rental­market/market­snapshots/adaptive­reuse­apartments/
  9. https://www.mckinsey.com/mgi/our­research/empty­spaces­and­hybrid­places
  10. https://www.mckinsey.com/featured­insights/sustainable­inclusive­growth/chart­of­the­day/no­quick­housingfix?cid=other­eml­chr­mip­mck&hlkid=153acb32795c4a338931dc8725a63ed3&hctky=12831642&hdpid=ee023ef9­3081­
    4867­9725­c02b4da09ee8
  11. https://www.nyc.gov/office­of­the­mayor/news/602­23/mayor­adams­dcp­director­garodnick­proposal­convert­vacantoffices­housing­through?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosmarkets&
    stream=business#/0
  12.  Hybrid work leaves offices empty and building owners reeling | 60 Minutes
    https://www.youtube.com/watch?v=TfUhykd1Ifc
  13. https://therealdeal.com/new­york/2024/01/16/nyc­snaps­up­nearly­50­properties­in­office­to­resi­accelerator/
  14. https://www.fastcompany.com/90593504/new­york­gov­cuomo­empty­offices­should­becomehousing?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosmarkets&stream=business

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