Just 2 percent of US office market slotted for conversion

Vacancy rates at 17%, but changing use is tricky

(Illustration by The Real Deal; Getty)
(Illustration by The Real Deal; Getty)

Transforming empty offices into housing, hotels or life-science space has been pitched as a cure-all for a sector still nursing pandemic wounds.

But a CBRE analysis of conversions either planned or recently completed reveals those projects would remodel just 2 percent of the nation’s 4 billion square feet of office inventory.

The national office vacancy rate was near a 30-year high in the third quarter, topping 17 percent, according to CBRE.

The report attributes the measly 85.7 million square feet of office space conversions to the laundry list of factors that a project needs to fall into place.

Structurally, the building has to be a fit. Unlike offices, which can skimp on windows, apartment buildings demand them.

And much of the older office stock with the lowest occupancy rates — towers built in the 1960s and 1970s — have floor plates too big to allow for windows in every unit.

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The analysis notes there are solutions for buildings like these: A developer could core a building to allow for light in interior units, or use the building’s middle for amenities or storage space.

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But those workarounds are often expensive and sacrifice living space. For developers to take on a pricey reuse project, a building would need to be sufficiently discounted.

“Our capital markets expert said the sale price has to fall below $100 per square foot to really make the deal work,” CBRE’s office research head Jessica Morin said.

Office buildings aren’t trading anywhere near that price point.

A report by Marcus & Millichap found the sale price of office properties has actually risen each year of the pandemic. The average price per square foot now hovers around $300.

Still, conversion activity has accelerated in the third year of the pandemic.

CBRE found 206 office conversions wrapped between 2016 and 2021, an average of 34 annually. This year, developers have already finished 38 and another 21 are slated for completion by year’s end. Some 76 are on the docket for 2023.

The report cautions that macroeconomic headwinds could alter some of those timelines.

Higher interest rates coupled with the uncertain future of work culture have made construction financing more expensive, putting a damper on office development.

It’s likely some developers will press pause on adaptive reuse projects until those conditions improve.