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8/26/24
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This report was provided by Yardi as part of their August 2024 Commercial Edge Office Market Report
As it has become increasingly clear that remote and hybrid work is here to stay, the interest in converting vacant offices into residential spaces has grown among building owners and policymakers. While conversion projects have remained somewhat niche, our new proprietary tool shows a larger pool of potential conversion targets than most may suspect.
The Conversion Feasibility Index (CFI) is a new tool developed by CommercialEdge Research, the Yardi Commercial Data and Research department, that uses a weighted scoring system to evaluate the characteristics of buildings and determine their suitability for conversion. The CFI is a score assigned to each building based on various factors, including building age, location, total square footage, building depth, mid-block location, use type, number of stories, floor plate shape, ceiling height, green-building certifications, walkability and transit accessibility.
Buildings’ scores are then categorized into three tiers: Tier I buildings are top candidates for conversion, Tier II buildings pose strong potential for conversion but may require some modifications or adjustments and Tier III buildings will face significant challenges and limitations.
In total, more than 228.3 msf (2.7% of existing stock) of office space is classified as Tier I, with an additional 1 bsf (12.1% of stock) classified as Tier II. Most conversion candidates are located within CBD or Urban submarkets, with only 6 msf of suburban office space classified as Tier I and 171.1 msf as Tier II.
With the continued destruction of office values and as we see an uptick in incentives at different levels of government, we believe the total pool for potential conversions into multifamily is larger than initially expected. Not a cure-all by any means, but the 1.25 billion square feet identified isn’t insignificant. -- Peter Kolaczynski, Director, CommercialEdge
Perhaps unsurprisingly, Manhattan has the largest share of its stock rated as conversion candidates, with 16.8% in Tier I and 36.3% in Tier II. While no other top market matches Manhattan in terms of space rated as strong conversion candidates, San Francisco (6.2% Tier I, 19.6% Tier II), Los Angeles (4.4% Tier I, 20.3% Tier II), Chicago (4.1% Tier I, 14.5% Tier II) and Miami (3.7% Tier I, 12.4% Tier II) also have significant amounts of office space with a higher potential for residential conversions.
Top Markets by Suitable Office Conversion Candidates
Although the pool of potential conversions is large, many projects may have a tough time penciling out. Local governments across the country have been ramping up efforts to increase conversions. New York City’s Office Conversion Accelerator, which expedites zoning and permitting processes, has enrolled dozens of buildings so far. Washington, D.C.’s Office-to-Anything Program offers a 15-year tax freeze for eligible projects. San Francisco's Request For Interest is an initiative meant to identify projects where the City Council can accelerate the building conversions through regulatory changes, financial incentives or more. the City Council of Chicago offers generous subsidies to convert downtown offices into over 1,000 apartments.
Additionally, further value destruction could make more conversions economically feasible. The average sale price of an office has been down 40% since 2021, and more than a quarter of all buildings sold this year have been purchased at a discount compared to their prior sale price.
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