A tale of two offices markets: Can conversions solve the surplus office problem?
- December 1, 2023: Vol. 10, Number 11

A tale of two offices markets: Can conversions solve the surplus office problem?

by Beth Mattson-Teig

This article is the second of a two-part series. Part one appeared in the November issue of the magazine.

In Manhattan, the Vanbarton Group is in the process of converting a 24-story office tower at 160 Water St. to a premier apartment building. The new project will add five new floors to create 588 units. Across the country, Hines is transforming the 217,000-square-foot South Temple Tower in Salt Lake City into a 255-unit luxury multifamily tower. Its conversion plan includes stripping the existing office building to its core and shell and repurposing the building structure to create an efficient residential floorplan.

Such conversions are by no means a new idea, but they are getting fresh attention as a solution to the growing supply of obsolete and underutilized office buildings. Nearly one-fifth of the office market in the United States is empty. According to CBRE, the average vacancy rate in the United States climbed to 18.2 percent in second quarter 2023. Many believe the overall size of the office market needs to shrink, with older and less desirable buildings either repurposed or razed.

Although there are plenty of examples of office buildings that have been transformed to alternative uses, such as hotels, retail and housing, office-to-residential conversions have moved to the forefront for obvious reasons.

“There is a huge housing crisis in most major cities, and there’s a crisis of office vacancy. So, converting to housing helps solve both problems in one go,” says Steven Paynter, design resilience leader, studio director and principal at Gensler in Toronto. In addition, converting office to residential is easier from a code-compliant perspective, whereas converting to other uses such as life sciences or long-term-care senior housing has more stringent requirements that make a conversion more challenging, he adds. Gensler is designing conversion projects globally, including 160 Water St.

According to a RentCafé analysis of Yardi Matrix data, the future for office-to-residential conversions looks promising. Among the 122,000 rental apartments currently in the pipeline from adaptive reuse, 45,000 are the result of office repurposing. A growing wave of troubled office loans also is likely to drive more conversion opportunities. Trepp is tracking steadily climbing CMBS loan delinquencies that have jumped from 1.50 percent to 5.07 percent over the past 12 months through August. The bigger driver for conversion activity will be as projects get built, it gives investors certainty that these projects can be done, adds Paynter.


Although there are plenty of examples of successful conversion projects that have been completed in cities across the country over the past two decades, opinions remain mixed on whether conversions are a viable solution that can be done at scale. “I know everyone loves to talk about it, and everyone thinks this is a great solution. But the reality is that we’re talking about maybe 1 percent to 2 percent of the overall building stock that would be even potentially feasible,” says Jay Lybik, national director of multi-family analytics at CoStar Group.

CoStar conducted an analysis on the possibility of office-to-residential conversions for buildings in urban and CBD areas. An aggressive view showed the market potential for conversion candidates at 6,878 office buildings in the United States that could create 465,300 new housing units. A more conservative estimate, and likely a more realistic scenario in Lybik’s opinion, showed that 2,689 office buildings representing 79.5 million square feet could be converted into 71,550 new housing units.

Industry experts agree conversions likely represent a fraction of the total office universe. “It may be 3, 4 or 5 percent, but that’s actually a lot,” says Adam Ducker, CEO at RCLCO, a real estate consulting firm. RCLCO did an analysis of the New York City market that showed a potential for conversions to create 20,000 to 25,000 new units of housing per year. “It’s not going to be the dominant real estate activity, but it is likely to be much more significant than it’s ever been in the past,” says Ducker.

That also bodes well for creating more knowledge, expertise and innovation around conversions. An important shift in the market is that there is a lot of attention focusing on conversions across the board from owners, investors and lenders to the technical trades. “We have a lot of obsolete real estate, and a lot of it is very well located,” says Ducker. “As we really continue to understand these buildings — understand how to work with them and bring down some of the barriers — I suspect that we’ll see more and more people focusing on conversions.”


Successfully executing conversion projects is no easy task. Along with the success stories are plenty of anecdotes of conversions that failed. One of the biggest hurdles to these complex office-to-residential conversions is structure. Traditionally, those office buildings that work best for conversions are older buildings with small floorplates. The problem that arises with large floorplates is there tends to be a lot of windowless space in the middle.

However, the market is seeing more creative solutions, such as carving out the middle of buildings to create more natural light or thinking about how to introduce alternative uses in the interior, such as storage, healthcare, fitness or even pickleball. “The technical expertise around how to deal with some of these challenges is improving,” says Ducker.

Conversions often require some compromises to the design, such as a layout that lends itself to creating an interior windowless room that can be used as a home office, adds Dan Vislocky, the founder of Station Cos., a New York City–based developer. Station Cos. has completed three boutique conversion projects in New York City since the global financial crisis. Conversions and adaptive reuse have been around for a very long time, and these projects can definitely be done profitably and with a good yield to investors, he says.

Office-to-residential conversions in particular are attractive because residential use can garner higher rent. “It all depends on the quality of the building. Is it worth saving? Are the bones good? Are there views? Is there parking? All of that plays into it, but it is clear that in New York it has worked over the years, and it will continue to work,” says Vislocky. “Right now it’s just tricky because construction and financing costs have gone up so much that it makes the conversion very difficult if you don’t have any kind of tax benefit.”

The regulatory environment can be another big impediment. Traditionally, cities have not wanted to lose office buildings for a variety of reasons, including jobs and tax revenue. “I think there has been a big sea change in realization that converting some of these buildings that don’t work is actually very good for the city. So, the regulatory barriers have begun to fall and very quickly,” says Ducker.

Although conversions can be costly, Paynter estimates conversion projects typically cost about 30 percent less than a ground-up residential building. “The basis value of the existing buildings also is coming down really, really sharply at the moment, and that puts a lot more of these projects into the bucket of being financially viable,” he says. The other piece that often gets overlooked in the discussion on conversions is the sustainability benefits. Avoiding a tear-down and rebuild can have a huge impact on carbon emissions and embodied carbon related to the concrete alone.


Owners and investors are exploring a variety of solutions to extract value from underperforming office properties. Partial conversions can be another viable option, such as preserving the upper floors as office space and adding hotel or retail on the lower levels. Oftentimes, those solutions are very dependent upon the nature of the building. If an owner chooses to bring in hotel or retail, does the building need separate entrances and lobbies and separate elevators to service the hotel and the office building? “We’re still early in the process of discovering what works and what doesn’t work from a design and engineering perspective, and also what does the customer accept,” says Ducker.

In other scenarios, owners see a better business case to unlock the underlying land value.

For example, Kearny Real Estate Co. purchased an eight-acre office campus in Santa Ana, Calif., in 2018 and conducted a major renovation and upgrade project that was completed in 2020. “We really thought that we brought the project to life. Unfortunately, the timing of the completion at the beginning of 2020 wasn’t ideal. The office leasing market came to a standstill, as everyone has been well aware,” says Dan Broder, assistant vice president at Kearny Real Estate Co. It was proving to be a challenge to reach stabilized occupancy.

However, the underlying zoning was always industrial, which allowed the firm to pivot to a new use. Kearny and Dune Real Estate Partners are now moving forward with plans to raze the office buildings in order to develop a new state-of-the-art warehouse and distribution facility. Construction on the 163,000-square-foot Harbor Logistics Center is expected to begin in fourth quarter.

There is tremendous demand for new, state-of-the-art industrial space in Southern California’s Orange County market, with the industrial vacancy rate currently hovering at around 2 percent, notes Broder. In some cases, industrial rents are on par with or even surpassing office rents. So, when Kearny looked at the numbers, it made sense that they would be able to generate a level of income that supported the demolition of the existing office building and new construction on the industrial building. In addition, there is limited available land for new development. “The scarcity of land makes sites like these really desirable,” he says.


The big question office owners and investors face for existing assets and new acquisitions is whether conversion is feasible. To get answers quickly, Gensler has developed an algorithm that it uses in an office-to-residential analytical model. The model looks at about 150 different inputs ranging from the size of floorplates and parking ratios to projected housing demand and rents. The analysis produces a score for the building from 0 to 100, with higher scores reflecting greater feasibility. The analysis also identifies where that building is scoring poorly, which creates an opportunity to fix a particular issue.

For example, Gensler ran an analysis on the 160 Wall St. conversion project in Manhattan. That building scored a 75, which is more in the orange zone of a “maybe” it would work. The analysis revealed that the middle of the building where restrooms were clustered in the office building weren’t useful for the residential building. “Knowing that and knowing that there is a strong housing market in New York, we demolished that space and then redistributed the weight to create penthouse units,” says Paynter. “So, that’s an example of a building where the analysis said, maybe there’s an issue, and then we came in as designers and fixed the issue and got the benefit out of it.”

Owners can spend a lot of time and money analyzing a potential conversion. Frankly, the vast majority, about 70 percent, don’t work. “The market doesn’t need every building to be converted,” notes Paynter. “It’s really about finding the good ones that will work.”


Beth Mattson-Teig is a freelance writer based in the Minneapolis area.

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