Apartment conversions seem to have stalled, as the office market is stuck between the expectation that workers will return and the increasing popularity of hybrid work, according to a RentCafe report.
Apartment conversions of office buildings or adaptive reuse, emerged after the pandemic as the solution to the increased demand for housing and the rejuvenation of deserted downtown areas. However, after a brief surge in conversions, there was a big drop-off in 2021 and 2022, the report says.
“Even so, interest in converting older buildings into residences remains high. In fact, our analysis of Yardi Matrix data shows that adaptive-reuse apartments are poised for impressive growth in the upcoming years. A whopping 122,000 rental apartments are currently undergoing conversion, 45,000 of which are the result of office repurposing,” the report says.
Highlights of the apartment-conversions report
- Office conversions are anticipated to lead the way, representing 37 percent of the total, followed by hotel conversions (23 percent of future projects). Factory conversions come in third place with 14 percent.
- At the city level, Los Angeles is predicted to continue to ride the adaptive-reuse wave in the future, with 4,566 apartments expected to be created through conversion. New York is set to see the creation of 3,987 apartments, while Chicago follows closely behind with 3,519 apartments.
- 10,090 new rentals were delivered nationwide in 2022, a decrease of 12 percent compared to one year prior and 25 percent fewer than in 2020. Los Angeles, Kissimmee, Fla., and Alexandria, Va. led the way in the number of repurposed buildings during this period. In these cities alone, the conversions make up 20 percent of the total nationwide. This indicates continued interest in adaptive reuse despite market uncertainties.
- Despite office conversions slowing down 15 percent, with 3,390 apartments delivered in 2022, they still represent a substantial part of the adaptive-reuse sector. Los Angeles converted the most offices into residential in an effort to revitalize its downtown area. As a result, 692 apartments entered the market. Office-to-apartment conversions made up 100 percent of the adaptive-reuse projects in Alexandria, Va. (435 apartments) and Baltimore (395 apartments).
- In a significant shift, former hotels experienced a record-breaking 2,954 new apartments resulting from conversion, a 5-year high. This building type’s easier, more straightforward transformation guaranteed a 43 percent increase in 2022 compared to 2021, almost mirroring office conversion.
“Office-to-multifamily conversions target smaller, older properties, yielding limited sector effects. Based on the latest research by real-estate company CBRE, the conversion of office spaces into multifamily units will primarily be restricted to smaller, older office properties due to factors such as construction costs and regulations related to residential construction,” said Doug Ressler, senior analyst and manager of business intelligence for Yardi Matrix.
“Market conditions that favor such projects include significant multifamily demand or government incentives, specifically aimed at promoting historic restoration efforts,” Ressler said.
