Office Conversions Find New Life After Values Plunge

As office vacancy rates hit record highs and property values plummet, developers are turning empty office buildings into much-needed residential spaces.

Han-Gwon Lung & Jordan B.
November 27, 2024

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Good morning. Developer attempts to turn vacant office towers into residential buildings have struggled to gain traction. Now, that appears to be shifting.

Editor's note: The CRE Daily staff will be off for Thanksgiving. We'll see you Friday—have a great holiday! 🦃🦃🦃

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Market Snapshot

S&P 500

GSPC

6,021.63

Pct Chg:
+0.57%

FTSE NAREIT

FNER

837.67

Pct Chg:
+1.33%

10Y Treasury

TNX

4.263%

Pct Chg:
-0.039

SOFR

30-DAY AVERAGE

4.844

Pct Chg:
0.0%

*Data as of 11/26/2024 market close.

PROPERTY REPORT

Office Conversions Surge as Property Values Plummet

As office vacancy rates hit record highs and property values plummet, developers are turning empty office buildings into much-needed residential spaces.

The bigger picture: Office-to-residential conversions are tackling two critical challenges: record-high office vacancies, which reached 19.2% nationally in Q3 2024, and an ongoing housing shortage that requires 3.8M new units nationwide to meet demand. In 2024, 73 projects were completed, up from 63 in 2023, with 309 more in development, set to deliver 38,000 units per CBRE.

Office conversions by construction status and estimated year of completion

Zoom in: Distressed properties like Washington, D.C.’s 2100 M Street, which sold for $66 million (down from $150 million in 2007), are being reimagined as housing, alongside iconic projects like New York’s Flatiron Building and Detroit’s Renaissance Center. In cities like Cleveland, where 12% of office space is being converted, design innovations like light wells and atriums are turning outdated buildings into vibrant residential hubs.

Challenges remain: Struggling office buildings often have tenants that need relocating, adding costs to conversions. Some properties also require costly modifications, like atriums for light and air. When expenses approach new construction levels, the math stops working. To adapt, landlords are adding eviction clauses to leases or retaining small stakes in sold buildings to learn the conversion process.

➥ THE TAKEAWAY

Looking ahead: Office-to-residential conversions are still a small part of the overall market but are proving to be a creative and impactful strategy to address dual challenges of high office vacancies and housing shortages. With over 71 million square feet of planned projects and new subsidies from cities, this trend is set to reshape urban centers and revitalize struggling downtown districts.

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✍️ Editor’s Picks

Lending shift: With stricter Basel III reserve requirements looming, banks are reducing direct CRE lending, while private equity firms step up as alternative lenders, reshaping the financing landscape.
Global rebound: Foreign investors are poised to reenter U.S. CRE in 2025, spurred by lower interest rates, a weaker dollar, and a focus on quality assets in both gateway and secondary markets.
CLO upswing: With speculative-grade defaults projected to fall and $117B in CLOs set to exit non-call periods, 2025 promises a rebound in refinancing activity and improved credit conditions.
Housing chill: New U.S. home sales fell 17% in October to a 2-year low, driven by Southern hurricane disruptions, rising mortgage rates, and affordability pressures.
Terminal expansion: DFW Airport, already larger than Manhattan, has begun constructing a $1.6B Terminal F with 15 new gates, set to boost capacity and economic growth in North Texas by 2027.
Mortgage innovation: Citigroup (C) has invested in fintech Pylon, enabling the bank to buy and securitize Pylon-originated mortgages while expanding its footprint in automated mortgage infrastructure.

🏘️ MULTIFAMILY

Retention surge: Apartment lease renewals hit 54% nationally in October, up 120 bps YOY, with strong retention in cities like Minneapolis and Detroit.
Affordable surge: 1- and 2-star apartments lead the rental market in growth, as steady demand for affordable housing bucks the luxury sector's struggles with oversupply and volatility.
Rent pressures: Despite slowing rent growth, 1 in 5 renters struggle to afford housing, resorting to second jobs, reduced savings, or family support as rental costs outpace wages and homeownership.
Brooklyn deal: Canvas Investment Partners and Tokyu Land US acquired 436 Albee Square, a 150-unit high-rise in Brooklyn, for $112.8M, reflecting strong multifamily demand.
Keeping it affordable: San Diego's proposed Deed-Restricted Affordable Housing Ordinance would require sellers of affordable housing properties to notify developers and grant them first offer and refusal rights.
Record fund: Belveron Partners closed its largest fund yet at $354M, exceeding its target to focus on creating and preserving affordable housing—$120M has been committed to projects in TX and CA.
Rent growth outlook: AvalonBay Communities (AVB) raised its NOI guidance, citing a strong Q3 and expected Q4 rent reacceleration, with 2025 demand poised to grow amid a favorable coastal market.

🏭 Industrial

Strategic realignment: Equinix (EQIX), the largest global data center REIT, is laying off 3% of its workforce to refocus on hyperscale growth and eliminate underperforming units.
Manufacturing expansion: Crystal Windows & Door Systems plans a nearly $100M manufacturing plant in Selma, NC, to expand its Southeast operations. Construction will begin next year.
Logistics acquisition: BGO purchased the 1 MSF Paloma Vista Logistics Center in Buckeye, AZ, for $118.3M, with Amazon (AMZN) as its sole tenant, highlighting Phoenix's robust industrial market.

🏬 RETAIL

Uncertain outlook: The triple net-lease market showed slight improvements over 2023, but with rising cap rates and mixed signals from rate cuts, future performance remains uncertain.
Retail trio: Colliers (CIGI) brokered $25.9M in Sarasota retail deals, highlighted by The Wilder Companies' $20.4M purchase of Shoppes at Palmer Ranch, a fully occupied Publix-anchored center.

🏢 OFFICE

Prime purchase: SL Green (SLG) is buying the 11-story office and retail condo at 500 Park Ave. for $130M, highlighting Park Avenue's enduring appeal with low vacancies, high rents, and top-tier tenants.
Legal expansion: Ropes & Gray will relocate to RXR Realty's 1285 Sixth Ave. in 2028 under a 20-year lease, with the potential to expand to 535 KSF.
Tower tenant: Pillsbury Winthrop Shaw Pittman leased a full floor in The Republic, Austin's 48-story office tower set to open mid-2025, underscoring demand for premium office spaces in the city.

🏨 HOSPITALITY

Land and expand: Blackstone (BX) invested over €500M in southern European hotels in 2024, including €235M for the Grand Hyatt Athens, as tourism rebounds globally.
Business boost: US hotel performance improved this fall with record demand driven by weekday business travel, but lagging weekend leisure rates suggest 2025 will bring steady, modest gains.

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📈 CHART OF THE DAY

Which retail cities have performed best?

Retail capital value growth Q2 2017 – Q3 2024 (% cumulative) / Source: MSCI

After years of decline, retail is showing signs of stabilization, with Austin and Riverside leading all the big city metros, according to Capital Economics.