Office buildings, the endangered species. A shock to the environment — the COVID pandemic, economic shutdown, and the emergence of a relentlessly home-based workforce — poisoned the ground. No, office space will not go extinct but, like many threatened species, some of the most astute real estate observers believe it will forever be diminished.

Then again, many threatened species evolve in ways that allow them to survive or even become resurgent. Office is spoken about in those terms, at least to the extent that it could be converted into another property type — namely, multifamily housing.

But how realistic is the wholesale repurposing of office to housing?

That was the target of a sprawling report written by the ULI Center for Real Estate Economics and Capital Markets, and the NMHC Research Foundation. The report, titled Behind the Façade: The Feasibility of Converting Commercial Real Estate to Multifamily, profiles 24 recent commercial-to-residential conversions, based on interviews with the developers behind the projects.

The report discusses the rising share of office buildings that find themselves suffering low occupancy rates in the wake of the COVID-19 pandemic — and office isn’t the only victim. By some estimates, there is 1 billion square feet of obsolete retail space in the United States. At the same time, Americans are feeling the crunch of a housing shortage amid a deficit of nearly 4 million homes, leading policymakers and developers to pursue creative solutions to increase our housing stock.

The universe of these obsolete buildings is large and growing, at least on the margin, according to the report, and changes at the margin can have huge impacts on the use of real estate. A segment of older, class B and class C office buildings is becoming functionally obsolete since overall demand for office space is anticipated to grow more slowly post-pandemic than in the past and be more focused on newer stock. In fact, JLL Research found that between the onset of the pandemic and the second quarter of 2022, buildings delivered in 2015 or later had 86.8 million square feet of net absorption, while pre-2015 buildings had net negative absorption of 246.5 million square feet. Almost 80 percent of the negative net absorption was in buildings delivered in 1980 and earlier.

Newer stock more readily supports technology, energy efficiency, and other environmental standards, as well as evolving space configurations and amenities, while older buildings may require relatively large capital expenditures to do the same, if possible at all. According to the U.S. Energy Information Administration, the median age of U.S. office buildings is 40 years, and more than a quarter — more than 4 billion square feet — is 60 years old or more.

The stock of brick-and-mortar retail has been experiencing the process of “rightsizing” for some time, as consumer tastes evolve. Like office, much of the older retail stock is no longer needed or able to provide the size or environment for today’s convenience and experiential shopping. Estimates range from several hundred million to 1 billion square feet of surplus and obsolete retail space.

What’s more, a segment of the country’s hotel stock is facing challenges as well, due to a slower-than-anticipated post-pandemic rebound and restoration of business travel.

As part of its research into the viability of converting commercial real estate to housing, the Urban Land Institute conducted interviews with developers of almost 30 projects to glean details about the conversion process and then developed detailed profiles of 24 of these projects. The projects are from across the United States and were primarily identified through the ULI networks of district councils and product councils.

The upshot: Conversions can be financially feasible in a broad range of markets, original uses, building conditions and circumstances. The report translated hard and soft conversion costs (excluding acquisition costs) into per-unit costs to provide a comparative metric across the projects profiled. Of the 21 projects for which the report’s authors were able to develop this metric, the median cost per unit is $255,000, with an additional five projects within plus-or-minus 10 percent of this per-unit cost.

The speed of conversions relative to ground-up development was noted as a financial advantage. As one developer described it: “Digging a hole, pouring concrete is slow. Six to 10 months can be saved if the sequencing of the conversion work is done correctly. When evaluating a project, speed and its impact on IRR [internal rate of return] is something we look at closely.”

But beyond the financial feasibility, the report emphasizes that understanding the complexities on the physical side provides insight into the practical context and therefore starts building the case or the potential extent of the universe of conversions. While all CRE conversions are driven by the strength of multifamily demand in their market and the decline of a particular well-located CRE asset (actual and/or relative decline), the “what” and “how” that went into each conversion are never the same.

As one developer of a late-1960s building says: “Converting a building is so much more complex than just a change in use ... floor plate, column grid, floor-to-floor height, window systems, HVAC [heating, ventilation, and air conditioning], sewer outfall, and so much more needs to be studied. You don’t really know what you’re getting into until you take off the facade, walls, bring it down to the concrete.”

And if this is true of modern buildings, it is even more so for historic structures. “Taking the facade off is always a wild card,” added a developer with a long history of revitalizing a wide range of older buildings. Still another developer added: “We didn’t know the extent to which we needed to upgrade the utility capacity until we opened up the walls.”

Because of the unknowns going into a conversion project, developers note that an experienced team is mandatory — the general contractor, architects, engineers — and the team needs to be nimble since redesign and reconfiguring happen in real time.

Not every building can work.

And remember, the underlying assumption that commercial buildings can be successfully converted to housing is the continued strength of multifamily and the continued market weakness of older offices.

Download the ULI/NMHC report here.

Mike Consol (m.consol@irei.com) is senior editor of Real Assets Adviser. Follow him on Twitter (@mikeconsol) and LinkedIn (linkedIn.com/in/mikeconsol) to read his latest postings. This article was largely excerpted from the Behind the Facade report.