The Potential and Challenges of Office-to-Residential Conversions

Though it is gaining attention, this option also involves many hurdles, according to the latest CommercialEdge office report.

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As the nation grapples with a shortage of housing and an increase in vacant office buildings, office-to-residential conversions are becoming an attractive opportunity for owners and investors, the latest CommercialEdge report shows. While conversions have gained popularity, they are not a one-stop solution to the housing shortage.

Many office-to-residential conversion projects are currently underway in several markets such as Dallas, Manhattan and Washington, D.C. However, converting an office building into residential units comes with challenges, including location, building configuration and high costs. For these conversions to become more than just a niche opportunity, government incentives will be necessary to make them more viable. California, Baltimore and Chicago are already taking steps toward this end.

READ ALSO: How Vacant Office Spaces Get New Life

Office-using job sectors recorded a 2.0 percent improvement year-over-year in March, adding 44,000 new jobs. Texas is leading the country in office job growth, with Dallas, Houston and Austin showing the highest year-over-year gains among the top 25 markets surveyed by CommercialEdge. Since the pandemic, both employees and firms have moved to the state, driving job growth in its top markets.

Nationwide, the under-construction pipeline continued to shrink, totaling 117.5 million square feet of office space at the end of March, or 1.8 percent of total stock. Year-to-date, only 6.1 million square feet of new office buildings have started construction across the U.S.

CommercialEdge expects this trend to continue in the near future, with most new construction focused on life science properties, owner-occupied assets or preleased ones. Meanwhile, office sales totaled $6.5 billion at the end of March, with assets trading at an average of $195 per square foot.

Office vacancy records slight uptick

The national office vacancy rate continued to climb, reaching 16.7 percent in March, up 80 basis points year-over-year and 20 basis points higher when compared to the previous month. While office vacancies increased in most markets, others recorded vacancy increases that dwarf the national change.

Austin led the way in this aspect, with a 630 basis-point increase year-over-year, alongside Portland (440 basis points) and Seattle (370 basis points). These markets also boast an extensive under-construction pipeline, which further exacerbates rising office vacancy rates.

National average full-service equivalent listing rates averaged $38.22 per square foot in March, increasing by 150 basis points year-over-year. Asking rates had double-digit year-over-year increases in San Diego (18.8 percent), Orlando (11.2 percent) and Seattle (10.5 percent), followed by Philadelphia (7.5 percent) and the Twin Cities (6.3 percent).

Read the full CommercialEdge office report.

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