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🏢 Office to Housing Conversions: 👔 8 Case studies + 🔥 $1.5B Fund

🏢 Office to Housing Conversions: 👔 8 Case studies + 🔥 $1.5B Fund

How to capitalize on this adaptive reuse trend

Ben Apple
March 21, 2023

Launch Letter is a weekly newsletter that breaks down real estate trends and topics. Subscribers include brokers, developers, industry executives, and investors. If you are not already a subscriber, sign up and join the others who receive it directly in their inbox each week — it’s free.

Here’s what you will learn in today’s email:

What is driving the office to housing conversion trend?
How can you analyze the feasibility of an office to housing conversion?
Why did a leading developer launch a $1.5B fund?
What are some successful office to housing case studies?
How can retail investors take advantage?
What are some other opportunities in the space?
How do the deal economics work?
What are your financing options?

👉 Problem

The US is short on housing. At the same time, due to rising remote work trends, we now also have an oversupply of office.

⚡ Big Idea

Remote work has been a growing trend, as many jobs can now be performed anywhere. The pandemic, as we all now know, accelerated many trends. Remote work was forced on many companies and now employees don’t want to go back to the office.

There is currently a tug of war between employers and their employees to get back in the office. While it is unknown who will win that battle, it is clear that the office has changed. There is now less demand for office and that trend is likely not reversing.

So what do we do with the excess office supply?

One obvious solution is housing.

Since the Great Recession in 2008, the US has been faced with a housing shortage. The pandemic also led to a temporary halt that slowed growth and hurt supply chains. The supply has yet to catch up to the demand and this has led to a spike in housing costs.

📊 Charts and Data

Remote work has changed everything for the office sector. An analysis by Cushman and Wakefield shows that the US office market could end up with 330 million SF of vacant space by the end of the decade, in need of repositioning.

Data from RentCafe shows the growth in office conversions, as the pandemic has shifted work trends.

In the markets with the most conversions, it is likely because they have the greatest number of feasible office developments for conversion. Other markets with an office glut, like NYC and SF, still face challenges in feasibility. Without the right combination of zoning, financing, and building footprints, these adaptive reuse conversions may not be feasible.

While other property types are also being converted to housing, office has been the primary conversion type, with 40% of the market.

As stated above, America's housing shortage is another converging trend that makes office to housing conversions attractive.

Starting with the Great Recession in 2008, new housing starts began to dip and we have yet to recover. The pandemic further spurred a demand for housing, and due to a lack of supply, housing prices spiked.

🔥 Opportunities

Invest in crowdfunding deals or raise capital with crowdfunding

Crowdfunding started to become a popular venue to finance these types of conversions. Opportunities exist to either raise funds for development or to invest passively in other development projects.

Here are some of the largest players in the crowdfunding space:

Meet the current housing demand

As we've discussed, there is a housing shortage in the US. These office to housing conversions can help alleviate the problem.

When evaluating an office to housing deal, feasibility is a big factor. Here are the primary factors to review:

Economic - Look for decline in value due to vacancy; Higher residential rent differential compared to office

Physical - Age of building (upgrades may be required); Class of building (B/C office most feasible); Size and layout of building (larger footprint may be too costly due to restructuring of building cores)

Regulatory - Possible zoning restrictions; Cap on residential space; Density limits; Regulations on light and air in residential

Take advantage of new zoning changes

Cities like NYC and SF are working to push favorable legislation for office to housing conversions.

Here's a look at the current status:

New York City

NYC is calling for more housing, 500,000 units by 2032! To achieve this, big changes need to happen. The city will need to change current zoning, for instance, by raising the residential floor area ratio cap, in order to make these conversions feasible. They would also need to provide financial incentives, such as tax abatements for affordable housing.

There is also a history of successful office to housing conversions in NYC.

In the 1990's, with high office vacancy and a lack of affordable housing, the city successfully implemented the 421-g program as a tax abatement to encourage office to housing conversions. The program led to the successful conversion of over 12k units in lower Manhattan using 421-g.

San Francisco

San Francisco is also calling for new housing, 82,000 by 2031. This is also a tall order, considering they haven't even built 5,000 per year. Gensler gives some suggestions as to how to achieve this, such as the following:

Streamline the review process
Reduce open space requirements for conversions
Offer financial incentives to offset costly building improvements

Sustainable conversions of older buildings

In the past, we discussed sustainable building and green retrofitting. There are opportunities for investors looking at office to housing conversions to make energy upgrades to their buildings while converting the use.

Take advantage of creative financing sources

While many traditional lenders may be shying away from this type of product, a wide range of creative solutions exist:

Crowdfunding

Historic Tax Credits

Low Income Tax Credits (LIHTC)

New Market Tax Credits

FHA 221(d)(4) loans

Tax credits and abatements - As referenced above, cities like SF and NYC are working on plans to provide tax incentives to encourage development. Check local city and state for possible incentives.

💼 Case Studies

The Wray - Washington DC - Converted from State Department building to 158 residential units

Watermark - Washington DC - US Coast Guard office building converted into 453 rental units

One City at 1401 Arch St - Philadelphia, PA - Former court building converted to residential

20 Broad St - New York, NY - Former NYSE building turned into 521 luxury apartments

100 Van Ness - San Francisco, CA - Largest office to residential conversion in SF, turning a 29 story office into 418 apartments

Millennium at LaSalle - Chicago, IL - $45M renovation turning former office into residential

180 Water St - New York, NY - Office to 601 unit residential conversion

One Wall Street - New York, NY - Largest NYC office to residential conversion, turning landmark office building into multi-million dollar condos

🤝 Players

Now that we’ve identified the problem and opportunities, let’s look at some of the players in the space.

Developers / Investors

Silverstein Properties - Raising a $1.5B fund for office to residential conversions! Partners with the "King of Office Conversions", Nathan Berman

Insight Property Group - Developed The Wray in Washington DC

Douglas Development - Developed office to housing conversions such as this one in Washington, DC

Macklowe Properties - Developed One Wall St. in New York, NY

CIM Group - Large developer with several office to residential conversions under its belt

Designers

Gensler - Created a process to identify potential office to housing conversions

SLCE Architects - Designed some of the most high profile conversions in NYC

Crowdfunding

Fundrise

Crowdstreet

RealtyMogul

✨ Predictions

Cities like NYC and SF will provide economic incentives, like the 421-g program, to encourage more office to housing conversions
Cities will begin to update zoning to allow for more conversions
Continuing the trend of urbanization, we'll see more office to residential conversions to revitalize underutilized buildings
Sustainability will be an important driver of these projects, with older buildings being retrofit to current energy standards
More economic incentives will be provided to create affordable housing in this type of conversion

✅ Key Takeaways

As the US is currently facing an oversupply of office and a lack of housing, an opportunity exists to convert out-of-date office into residential.
Smart investors and developers are finding underutilized office properties and converting them into much needed housing.
Creative financing exists for these types of properties. Examples include Crowdfunding, Historic Tax Credits, New Market Tax Credits, and Low Income Housing Tax Credits.
Feasibility drives these projects, as office to housing conversions do not make financial sense for all buildings.
Sustainability is a large component of these adaptive reuse projects. Retrofitting older buildings for office to housing conversions can be a sustainable way to revitalize an underutilized property.