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Yesterday's office building, tomorrow's apartments; more conversions on the horizon
Yesterday's office building, tomorrow's apartments; more conversions on the horizon
Yesterday's office building, tomorrow's apartments; more conversions on the horizon

Published on: 04/02/2024

Description

(TND) — A persistent lack of housing coupled with falling demand for office space could spur efforts to turn more of those spaces into apartments.

Doing so could be a win-win as the shift to hybrid working leaves more office buildings sitting vacant.

“Absolutely,” said Jessica Morin, CBRE’s director of U.S. Office Research. “I think there is definitely a newer and better use for a lot of our obsolete and less attractive office buildings that are going to have a challenge finding tenants who want those spaces.”

But there aren’t a lot of office buildings that hit the sweet spot for being converted into apartments.

CBRE, a large commercial real estate services and investment firm based in Dallas, said the “hardest-hit buildings" that account for the vast majority, 80%, of office occupancy loss since early 2020 only comprise about 10% of all office buildings in the markets it tracks.

Downtown markets, especially in the Pacific and Northeast regions, have a higher share of those kinds of buildings, according to CBRE.

But the share of those “hardest-hit buildings" that fit well for apartment conversions is even smaller.

Many aren’t in desirable locations or are too big.

Morin said office buildings that have floors bigger than 15,000 square feet are a problem for developers, because natural light wouldn’t flow all the way through the refurbished space.

That would leave developers with a chunk of space in the middle of each floor that couldn’t be used for apartments. That would be space that wouldn’t make them money.

“You pretty much need it to be luxury rents to be able to make these things pencil out,” Morin said. “So, you have to think is the office building located in a space where residents would want to live? And then typically, you know (the vacant building) could be not working out on the office side because it's not near where the labor is or in an attractive neighborhood that's like a ‘live, work, play’ (destination).”

CBRE said the cost of conversion may range from $100 to $500 or more per square foot, depending on the original layout, existing conditions and scope of the work.

Cleveland has the highest percentage of its total office inventory (11%) either currently under conversion or planned for such conversion, according to CBRE.

It’s not all fully residential. About half is, with the other half comprised of mixed-use and various other purposes.

Boston has the most total square footage (6.1 million) under conversion or planned for conversions.

The nationwide office vacancy rate has climbed about six percentage points over the last four years and now sits at over 18% nationwide, Morin said.

She said they’re expecting about 100 office-conversion projects in big cities nationwide this year, more than double the annual average between 2016 and 2022.

“We're looking at 2024 as really the year where we see a good spike in projects,” Morin said.

RELATED: Retail space remains limited, office demand continues to be impacted by hybrid work: forecast

A recent Goldman Sachs report said a housing shortage has persisted since at least 2007.

And the National Association of Realtors’ chief economist previously told The National Desk that we’ve been building too few homes for over a decade.

The supply constraints on housing have contributed to a big affordability crunch on people looking for a place to live. Bankrate put out a report this week that found Americans need 46% higher incomes now than they did four years ago to afford a typical home.

But Goldman Sachs analysts said there are major physical and financial hurdles to turning old, empty office buildings into places for people to live. And they said government subsidies will be needed to make those investments feasible.

News Source : https://wfxl.com/news/nation-world/yesterdays-office-building-tomorrows-apartments-more-conversions-on-the-horizon-commercial-real-estate-hybrid-work-downtowns-revitalization-housing-crunch-supply-developers-cbre-bankrate-nar-goldman-sachs

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