Office Conversion Projects to Double This Year
Markets with older office buildings such as Cleveland and Houston are prime locations.
Despite the high construction cost that comes with converting office buildings, there’s been a notable increase in the activity in the past six months with Cleveland and Houston considered the most ideal markets, according to a new report from CBRE.
Office-conversion completions are expected to more than double this year over last. And with hundreds more of these projects in the pipeline, many urban office centers are slowly being transformed into more vibrant, commercially diverse districts, according to the report.
Nearly 70 million sq. ft. of office space or 1.7% of total US supply was undergoing conversion to other uses in Q1 2024, up from 60 million sq. ft. or 1.4% of total supply in Q3 2023.
Conversion costs generally range between $250 and $650 per square foot, depending on the complexity of the project. High interest rates are an additional challenge, although CBRE expects rates will begin to fall later this year.
The majority of projects are converting to multifamily housing with one—third of the approximately 120 office-conversion projects nationwide doing so.
Since 2016, CBRE reported that 133 office-to-multifamily conversions created more than 22,000 apartments. The 169 underway or planned projects are estimated to produce another 31,000 apartments over the next several years.
“Nevertheless, this additional supply represents less than a half-percent of total U.S. apartment inventory and will do little to alleviate the broader U.S. housing shortage,” according to the report.
Because they are rich in older office buildings, Cleveland has the highest percentage of total office inventory being converted (11%) and Houston has the most square footage at 6.2 million.
CBRE notes that eight of the top 10 markets for conversion activity had an office vacancy rate above the 18.6% US average as of Q4 2023.
Helping matters is that many state and local governments are considering subsidizing conversion projects, and easing zoning restrictions to speed up the approvals process.