What’s Driving Office to Residential Conversions in the Most Active Cities

Office-to-residential conversions are not a recent development, but they have gained momentum since COVID, particularly as vacancy rates in Class B and C office buildings have risen. However, vacancy alone is not sufficient reason enough to convert as many factors need to be weighed:

1. Does the property have zoning that allows for residential conversion?
2. Do the floor plates lend to conversion? Is there sufficient light and air?
3. Does the cost benefit make sense to convert? Is the highest and best use to remain office?
4. Does the base building work, TI, and free rent justify leasing new office space? 
5. Are there tax abatements and subsidies to facilitate a residential conversion? 
6. Is there sufficient demand for new residential housing? 

There are universal questions which could apply to any city. However, some cities have figured out how to facilitate conversions better than others. 

Manhattan, Northern VA, D.C., and Dallas/Ft. Worth have the most office square footage being converted respectively at 17.2 million, 14.2 million, 7.8 million, and 6.3 million square feet. It is not surprising that Manhattan leads the way as it has the largest office stock by far at over 500 million square feet. What is more instructive is the percentage of office space converted - these four cities again lead, but in different order with Northern VA at 8.7%, followed by 4.7% in D.C., and both Manhattan and DFW at 3.4%. 

So, what do these markets have in common? The office availability rate in DFW at 27% would certainly explain having the need, but Manhattan has the lowest rate at 16%. The need for housing is no doubt also a factor. Manhattan has the lowest residential vacancy rate in the city at 3.2% while D.C. sits at 7.7%, but Dallas has an 11.9% vacancy rate for apartments. 

What these four cities do have in common are their tax abatements and subsidies. New York City’s 467-m provides a 35-year tax abatement provided that 25% of the housing is affordable. Washington D.C. provides a 15-year tax freeze with their ‘Office-to-Anything’ program. Dallas has 25-year tax credits for buildings older than 50 years, along with a tax increment financing program. Of additional note, Northern VA has figured out how to fast track the approval process of conversions down to 4-5 months. 

Other top cities should take notes. Nine out of the 15 cities Avison Young studied had 2% or less of their office stock converted to residential. LA has only converted .3% of its office stock, which is surprising given that it has a relatively low residential vacancy rate at 5.3% while its office stock of close to 300 million square feet’s availability stands at close to 25%. If LA could facilitate the same conversion rates as say Manhattan or D.C., this could create over 10 million square feet of housing.  

There are certainly lessons to be learned by cities who have figured out how to facilitate office to residential conversions, which in turn strengthens the office market while supplying much needed housing.