From Work To Home: The Offices Finding New Life As Residential Blocks

From Work To Home: The Offices Finding New Life As Residential Blocks

Commercial real estate is facing a downturn as low occupancies, high energy prices, inflation and recession slash valuations and deal-making activities.

Office owners and investors are now laden with depreciating assets that are harder to shift. Some firms, such as RXR Realty in New York, are preparing to surrender ownership to the bank and terminate debt repayments.

Conversely, residential property is undergoing a supply crisis in many major cities across North America and Europe. In Canada, average home ownership costs are now a record 62.7% of household income. The US is experiencing a nationwide home shortage, which is driving up rents and purchase costs. The State of New York has declared a crisis and announced a strategy to build 800,000 new residences. California has approved a plan to construct 82,000 homes in San Francisco within the next eight years to ease pressures.

Converting offices into residential properties could offer struggling commercial landlords a new opportunity, while reducing housing deficits. CBRE data shows that conversion rates will have roughly tripled in the US between 2021 and 2023: from 6 million to 18 million square feet per year. However, this accelerated rate still won’t be enough to make a dent in the oversupply of office space.

Several cities support schemes to encourage the development of unused office space into apartments. New York’s Mayor proposed the removal of housing restrictions in commercial districts and the introduction of tax breaks to encourage the creation of 20,000 flats from existing structures. Boston is exploring a similar scheme with a new study. The LaSalle Street initiative in Chicago aims to convert vacant commercial space into 1,000 new homes, of which 300 will be affordable units.

There is some pushback against commercial real estate conversions. Such projects are often costly and complicated, and owners are unwilling or unable to undertake the task. Office buildings often don’t match residential requirements, and badly-executed developments are currently causing issues for new tenants due to unsuitable locations or low-quality structures. A study by Gensler found that only 30% of the 300 US offices analysed would be suitable for conversion.

The rate of conversion projects is likely to continue increasing as office vacancies remain high and housing supplies low. However, the mismatch between existing building designs and residential requirements means that this is not a silver bullet for commercial landlords. There are other avenues to be explored, such as the creation of life science spaces, hotels, retail premises and multi-use properties.