Converting Office Buildings to Housing: Limits of the Possible

There are cities with high vacancy rates in their office buildings, as work-from-home has become more common.

There are also cities that would like to expand their supply of housing. Thus, the idea of converting office buildings to housing offers the possibility of hitting two policies with one shot. Arpit Gupta, Candy Martinez, and Stijn Van Nieuwerburgh discuss the possibilities of Converting brown offices to green apartments” (Hamilton Project at Brookings, November 2023).

The short answer is that the possibilities are both real and limited. The authors write:

Not every office property, however, is suitable for conversion [to apartments]. Three conditions must be met for a conversion to take place: (i) the building has to be physically suitable for conversion, (ii) the zoning and building codes have to permit and facilitate such a conversion, and (iii) the financial return of the conversion has to properly compensate the developer for the risk they are taking.

The authors have data on commercial office markets in core urban areas across 105 cities. (They acknowledge that that some office buildings outside the urban core might also be suitable for conversion, but it’s not their focus here.) Using that data, they consider what kinds of office buildings are most suitable for conversions. They write:

We believe that buildings built before 1990 are the most viable conversion candidates. Many historic buildings tend to be less expensive, have smaller floor plates, and have more character, all of which increases their conversion appeal. … The  size of the building cannot be too big or too small, so we exclude buildings with a total size less than 25,000 square feet as well as large buildings with deep floor plates. Smaller buildings could be convertible, but they are less likely to attract institutional capital and federal grants. Deep floor plates have existing floor plans that start the building at a disadvantage: Too little interior light and air, too little plumbing, and too many elevators. Structural changes to remedy these
buildings for residential use are likely cost prohibitive. … We narrow our sample of candidates further by selecting buildings with no (or few) major long-term leases left.

After carrying out this exercise, what’s left? They identify 2,431 properties out of a total of 22,215 office buildings in these 105 cities–with about one-fifth of all the possible properties being in New York City. They estimate:

At 875 square feet per apartment unit, and after incorporating a 30 percent loss factor, these conversions could create 158,654 additional housing units. Scaling up for incomplete data coverage results in 367,750 apartment units. For comparison, about 260,000 apartment units were created in the U.S. in a typical
year between 2001 and 2022.

Of course, not all of these potential conversions will be financially viable, either–a determination that would vary across cities and properties. But in a very broad sense, it seems reasonable to say that office-to-residential conversions might be equal to about a year’s worth of standard apartment-building for the nation as a whole. Thus, on one side, every city should be looking over its inventory of office buildings and figuring out which ones might be suitable for conversions. On the other side, such conversions are likely to make only modest progress on the goal of additional housing.