Work from home could lead to more homes in vacant offices

A growing number of office buildings have found second lives as apartments, boosted by the Covid-era work-from-home movement that slashed office attendance and thinned out cities’ downtowns.

But breaking up sterile, expansive workspaces into inviting homes is harder than you might think. Real estate developers say these projects can be like working out a puzzle: Office buildings are designed with very different considerations than apartment dwellings. Some conversions aren’t possible, and unexpected costs can add up.

Even so, as office vacancies hit a record 20.1% in the United States in the second quarter of this year, local governments have upped incentives for office building conversions. These include tax breaks and speedier approval processes for real estate developers willing to remake the spaces.

Nearly 70 million square feet of office space, or 1.7% of the total US supply, was in the process of being converted for other uses in the first three months of 2024, according to a recent report from a commercial real estate firm. Sixty-three percent of those conversions are expected to be into multi-family housing.

How does it work?

At first glance, an apartment building in Los Angeles’ Koreatown neighborhood seems like a typical luxury high-rise. It boasts plush amenities like a fitness center and pool deck. Residents of the building’s apartment units may not know, though, that their building was the former West Coast headquarters of an oil and gas company.

Converting an office space into luxury units requires ‘basically gutting everything,’ said the building’s owner, which oversaw the renovation.

Unlike a traditional office layout, each apartment unit needs to have at least one bathroom and a kitchen, meaning plumbing must be reworked. And most office buildings have central air conditioning, so the system needs to be replaced with individual cooling and heating systems for each unit.

Sometimes, the project is costlier than expected. ‘Especially for buildings that have been around for a long time and have seen lots of different tenants over the years — there have been times when we’ve opened up a wall and realized there is more work to be done,’ said the building’s owner.

Although converting unused office buildings into housing units may seem like an easy remedy for the affordable housing crisis, some office buildings cannot feasibly be converted into housing, said a real estate developer.

‘Only about 15% of office buildings here in the markets that we’re based in are potentially good candidates for office-to-housing conversions,’ said the real estate developer.

Older buildings are best, he said. Apartments require operable windows, which most newer buildings lack. Apartment units need access to windows facing the exterior. To have access to natural light, the units can’t stretch too far from the windows, he said.

Older buildings also qualify for historic tax credits, making these conversions more financially feasible, said the real estate developer.

The key to these conversions is local government buy-in. Recent tax breaks and major cities loosening zoning restrictions like the required width of apartment stairways and parking requirements have made more of these transformations possible.

Local governments aren’t only pushing for office building conversions, though. Real estate developers have transformed abandoned schools and hotels into housing, as well.

‘Large office buildings are probably the most difficult to do,’ said a real estate developer. ‘Hotels and schools are easy.’

One of the largest ever office-to-residential conversions will begin construction soon: The former headquarters of a company in New York’s Midtown will be converted into roughly 1,500 new rental apartments.

Los Angeles also recently established a faster approval process for the conversion of existing buildings that are at least 15 years old.

‘Encouraging the reuse of buildings is a sustainable practice to extend the life of buildings and retain much of the resources that went into their initial construction,’ said a statement from the city.

The real estate developer is proud of the Stadium Lofts, an apartment building built from the remnants of an old baseball stadium in Indianapolis. He bought the stadium from the city for $1 and revitalized it for $28 million, including $5 million from the city.

‘I went to the city and said, ‘Look, this is physically possible, but I have a $5 million gap between what it’s worth and what it costs,’ and the city said they’d fund the gap because it would help expand downtown and add to the vibrancy of the neighborhood,’ said the real estate developer. ‘It turned out to be one of the best projects I ever did.’