As urban office vacancy rates soar, the push to convert office buildings to multifamily residences is in full swing. Our advice to design professionals? “Proceed with caution.”
“Solve the affordable housing crisis!” “Revitalize downtown!” “Improve the tax base!” “House the homeless!” Well-meaning intentions have helped fuel the recent interest in converting vacant commercial office buildings into multifamily residences.
Why the rush?
On the surface, this type of “adaptive reuse” project makes perfect sense, particularly in cities with a central business district with high commercial vacancy rates. The pandemic’s concentration among dense populations and the resulting work-from-home trend pushed many to the suburbs, leaving once-vibrant downtowns struggling to keep offices, apartments, and condos occupied. Without the associated foot traffic, thousands of downtown businesses have closed or moved elsewhere, leaving the central business district a shell of its former self.
Meanwhile, office building owners in the U.S. are attempting to refinance approximately $137 billion in mortgages this year and nearly half a trillion dollars in the next four years.1 Faced with defaulting on their loans or refinancing at higher interest rates, some owners are looking to convert their buildings to residences.
Building owners aren’t the only ones considering conversions—they’re joined by mayors and city councils. In Washington, DC, Mayor Muriel Bowser hopes that office-to-residence conversions will help add 15,000 new residents.2
Unexpected gift or Trojan horse?
While these conversion projects may appear to represent a growing market segment for design professionals, the reality isn’t quite so rosy. From 2010 through 2022, just 222 office-to-residence conversions were completed in the U.S.3 The design firm Gensler developed an algorithm for evaluating whether an office building is a viable candidate for conversion to a multifamily residence. Gensler used the tool to evaluate nearly 1,000 office buildings across North America and found that only about 30 percent of the buildings are viable candidates for conversion.
Factors such as cost, zoning regulations, or building design constraints make conversions challenging.
Factors such as cost, zoning regulations, or building design constraints make conversions challenging. If you and your client are considering a conversion project, you’ll need to weigh a number of key factors about the existing structure that will impact the feasibility and success of the project, including:
- Character: Does the building have historical significance or architectural details, such as high ceilings, that will make it attractive to potential renters or buyers? Will some of those same features complicate the conversion process?
- Structure: Does the building have sufficient load-bearing elements, or will it need additional reinforcements to ensure the safety and stability of the converted space?
- Footprint: Can each floor accommodate enough units to make the conversion profitable?
- Envelope: Is the building envelope intact or will it need a new exterior? The need for a new exterior, especially if it involves removing the existing one, will increase construction costs and delay completion, which may mean the project will not work financially.
- Floor plate: Is the plate shallow enough to provide windows and natural light for each unit or will it require, for instance, cutting an atrium into the middle of the building from top to bottom? Can the depth of the floor plate accommodate additional ducting and piping without conflicting with structural elements?
- MEP: Can the building accommodate additional plumbing needs? An office building design can locate restrooms in the same place on each floor, confining the plumbing chases to a single area, but including 25 or 30 residences per floor means the bathrooms and kitchens will be in multiple locations on each floor.
- Building codes: How will building codes impact design? Depending on the building’s age and site, the codes may require additional accessibility upgrades and flood, seismic, and hurricane protection measures.
- Record drawings: Are there adequate record drawings to refer to, including a history of any remodels or changes to the building? The older the building, the less likely there will be adequate records you can use to create a budget or anticipate project challenges; there’s also a greater chance that you’ll encounter unforeseen conditions.
There are a host of other issues to consider, such as windows that don’t open, acoustics, parking availability, and what to do with the space taken up by more elevators than residents would need. Moreover, the height of the existing building and the density of the surrounding area may increase construction costs and complicate construction staging and sequencing.
Assuming you and your client believe you can make a design work, there are equally challenging external issues that you’ll encounter:
- Affordable housing requirements: Many cities now require that a portion of residential units be made available to rent at affordable rates. While such requirements are intended to increase affordable housing, they also cut into an owner’s profits, making a conversion less attractive.
- Zoning: While many downtown office buildings are in areas zoned for a mix of office, retail, and residential uses, your project may still have zoning hurdles to clear, such as a cap on the number of units per floor. Many owners may find that their conversion can’t turn a profit with a lower number of units than planned.
- Permitting: Many owners may feel that investing the time and effort to obtain a permit for a conversion, which can often take a year or longer and involve mountains of paperwork, might not be worth it, especially since there’s a chance the project won’t be approved. Also, building owners, faced with maturing commercial loans at significantly higher interest rates, may not have enough time to weather the permitting process.
- Energy: Each city has its own requirements regarding building energy use. For example, if the existing building lacks triple-glazed windows, the city might require the owner to tear down the curtain wall and start from scratch. In addition to the extraordinary cost, replacing the curtain wall is going to involve massive amounts of embodied carbon, which undercuts the current trend of minimizing a building’s carbon footprint.
Should you jump in?
Before you take on the design of an office-to-residence conversion, there are several areas to address with the client. These include:
- Is there enough funding? Does the client have the funding in place, including a larger-than-usual contingency fund? If funding relies on property tax abatements, historical preservation grants, or other incentives, are they guaranteed despite a possible change in city government or other unpredictable events? If the client’s funding falls through, you could be left with unpaid bills.
- Is the client experienced in office-to-residence conversions or major renovations? If they lack significant experience in these areas, it may be in your best interest to decline the project.
- Does the client understand the uncertainties involved with such projects? Explain that the discovery of unexpected conditions such as structural deficiencies, environmental hazards including asbestos, or unforeseen site conditions can cause costly changes or delays and may necessitate a reevaluation of your scope of work, schedule, fees, risk allocation terms, or even your continued involvement with the project.
These concerns are in addition to our usual guidance about providing services on highly complex projects or : work with your lawyer and insurance broker to negotiate strong and insurable contracts that protect you from unforeseen site conditions and other issues beyond your control, document all conversations and decisions, and proactively manage the stakeholders’ expectations. These and other risk management suggestions are spelled out in the AXA XL Contract Guide for Design Professionals, available on the .
Office-to-residence conversion projects may indeed help increase affordable housing, revitalize downtowns, and bolster tax revenues. However, view such projects with a wary eye, mindful of the myriad conditions, complexities, and concerns that can complicate the project.
References
1. Trepp Inc. CMBS maturity data, 2023.
2. Associated Press, “,” Anderson, M., Casey, M., and Khalil, A. April 24, 2023.
3. , Malizia, Emil PhD, CRE. March 2022, page 10. © 2022 NAIOP Research Foundation.
Chart source: “” and “.” CBRE Research 2023
