Reality Check: The Limited Impact of Office-to-Multifamily Conversions on Real Estate Market

The concept of repurposing office buildings into multifamily apartments seems enticing on paper. However, in practical terms, only a limited selection of office properties are genuinely suitable for such transformations.

Experts have quantified the potential scope of office-to-apartment conversions through two likely scenarios, each illustrating a feasible upper limit of possible conversions.

For this evaluation, we gauge physical feasibility based on buildings with floor plate sizes of 30,000 square feet in the more ambitious scenario, and 20,000 square feet in the more cautious one.

Current vacancy rates are employed as indicators of an achievable acquisition-cost basis. The ambitious scenario uses a 25% vacancy rate, suggesting substantial public support to make the finances viable, while the conservative scenario assumes a 50% vacancy rate.

Suburban office buildings are excluded from this analysis, with the understanding that new multifamily property developments in suburban areas generally present more attractive financial prospects than conversions.

The analysis suggests a more modest potential for conversions than some other reports. Even within the more ambitious scenario, merely about 6% of the total office inventory would be transformed.

Given the present market conditions, the narrative of converting offices to multifamily units is intuitively appealing. However, the reality suggests that, although these conversions can transform the neighborhoods they occur in, they are likely to be few and far between.

If we assume that office tenants would move to other premises, this would reduce the vacancy rate by approximately 250 basis points, still keeping it above 2019's year-end level.

From a multifamily perspective, the ambitious scenario could contribute around 465,000 units to the supply, accounting for approximately 2.5% of the current inventory.

While this is a significant number, it's overshadowed by the existing multifamily construction pipeline, with 5,200 projects and 1.1 million new units in progress.

At this level, such office to multifamily unit conversions are unlikely to notably influence market fundamentals for either office or multifamily sectors, much less address the prevailing housing shortage.