Work from home could lead to more homes in vacant offices

(CNN) — Most Americans know the No. 1 rule in real estate: “location, location, location.” But for some developers, there’s a new winning strategy: “recycle, recycle, recycle.”

A growing number of office buildings have found second lives as apartments, boosted by the Covid-era work-from-home movement that slashed office attendance and thinned out cities’ downtowns.

But breaking up sterile, expansive workspaces into inviting homes is harder than you might think. Real estate developers say these projects can be like working out a puzzle: Office buildings are designed with very different considerations than apartment dwellings. Some conversions aren’t possible, and unexpected costs can add up.

Even so, as office vacancies hit a record 20.1% in the United States in the second quarter of this year, according to a recent report from Moody’s Analytics, and the supply of homes remains persistently below demand, local governments have upped incentives for office building conversions. These include tax breaks and speedier approval processes for real estate developers willing to remake the spaces.

Nearly 70 million square feet of office space, or 1.7% of the total US supply, was in the process of being converted for other uses in the first three months of 2024, according to a recent report from commercial real estate firm CBRE. Sixty-three percent of those conversions are expected to be into multi-family housing.

How does it work?

At first glance, The Crosby, an apartment building that opened in 2020 in Los Angeles’ Koreatown neighborhood, seems like a typical luxury high-rise. It boasts plush amenities like a fitness center and pool deck. Residents of The Crosby’s 336 apartment units may not know, though, that their building was the former West Coast headquarters of oil and gas company Texaco.

Converting an office space like Texaco’s into luxury units requires “basically gutting everything,” said Jaime Lee, CEO of Jamison Group, the building’s owner, which oversaw the renovation.

“We are basically clearing the floors,” she said. “You just have the floors, the building shell and the elevators left.”

Unlike a traditional office layout, each apartment unit needs to have at least one bathroom and a kitchen, meaning plumbing must be reworked. And most office buildings have central air conditioning, so the system needs to be replaced with individual cooling and heating systems for each unit.

Sometimes, the project is more costly than initially expected. “Especially for buildings that have been around for a long time and have seen lots of different tenants over the years —there have been times when we’ve opened up a wall and realized there is more work to be done,” Lee said.

Although converting unused office buildings into housing units may seem like an easy remedy for the affordable housing crisis, some office buildings (even those that are entirely empty or have multiple floors sitting empty) cannot feasibly be converted into housing, said Chris Sherman, the president of Sherman Associates, a real estate developer based in Minneapolis.

“Only about 15% of office buildings here in the markets that we’re based in are potentially good candidates for office-to-housing conversions,” Sherman said.

Older buildings are best, he said. Apartments require operable windows, which most newer buildings lack. New buildings also tend to have a larger square footage. While that may initially seem like a positive, apartment units need to have access to windows facing the exterior. To have access to natural light, the units can’t stretch too far from the windows, Sherman said.

“You end up with a scenario where you’re not able to utilize a lot of the middle of that floor plate,” Sherman said.

Local governments play a role

Older buildings also qualify for historic tax credits, making these conversions more financially feasible, said Sherman.

The key to these conversions is local government buy-in, said Jason Ward, the co-director of the RAND Center on Housing and Homelessness. Recent tax breaks and major cities loosening zoning restrictions like the required width of apartment stairways and parking requirements have made more of these transformations possible, Ward said.

In September, New York City Mayor Eric Adams announced an effort to eliminate mandates that parking spaces be included with new construction, freeing up space to build more homes.

One of the largest ever office-to-residential conversions will begin construction soon: The former headquarters of Pfizer in New York’s Midtown will be converted into roughly 1,500 new rental apartments.

Los Angeles also recently established a faster approval process for the conversion of existing buildings that are at least 15 years old.

“Encouraging the reuse of buildings is a sustainable practice to extend the life of buildings and retain much of the resources that went into their initial construction,” a March ordinance from the city said.

Local governments aren’t only pushing for office building conversions, though. John Watson, CEO of Indianapolis-based Core Redevelopment, said he has transformed abandoned schools and hotels into housing, as well.

“Large office buildings are probably the most difficult to do,” Watson said. “Hotels and schools are easy.”

The project Watson is most proud of, though, is the Stadium Lofts, an apartment building built from the remnants of an old baseball stadium in Indianapolis. He bought the stadium from the city for $1 and revitalized it for $28 million, including $5 million from the city.

“I went to the city and said, ‘Look, this is physically possible, but I have a $5 million gap between what it’s worth and what it costs,’ and the city said they’d fund the gap because it would help expand downtown and add to the vibrancy of the neighborhood,” Watson told CNN. “It turned out to be one of the best projects I ever did.”

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