Regional disparities are defining the next phase of office distress, as some markets stabilize while others face mounting financial and legal complications. Weak demand, regulatory hurdles and legal tensions are converging in different ways across regions—pushing some markets toward adaptive reuse while challenging others to navigate increasingly complex debt and litigation issues.
In the Northeast, where office vacancies and defaults remain elevated, turning obsolete properties into housing use has become a common solution. Jon Restivo, managing partner at DarrowEverett, told GlobeSt.com that these projects often come with environmental complications.
"Converting a building from an office/commercial use to a residential use can implicate a host of environmental concerns," he said.
He noted that the most common issues—such as asbestos and lead paint—are hardly new to landlords of older office buildings, which dominate many Northeastern cities. The regulations governing those materials apply across both commercial and residential settings, Restivo explained, but the disclosure requirements and safety procedures for renovation or maintenance differ in important ways. That means developers new to the residential conversion space may encounter compliance challenges they haven't faced before.
Beyond environmental hurdles, Restivo pointed to broader litigation trends emerging in the commercial real estate market as owners grapple with stagnant demand. Landlords seeking to keep aging buildings competitive may need to cut rents, a move often constrained by the debt tied to those properties.
"These limitations are often driven by the debt supporting the property/project," he said. "Newer buildings with more amenities are both more attractive and more competitive, driving aging buildings to receivership."
As financing structures become more layered—with multiple tiers of debt and equity—Restivo expects to see more clashes among investors when properties enter distress. Conversion efforts can also heighten landlord-tenant conflicts, from the removal of occupants who resist leaving to disputes over ambiguous lease provisions.
"Conversely, tenants with excess capacity might likewise be looking for reasons to leverage landlords into concessions," he said, adding that while full-scale lawsuits may be rare, "saber-rattling" around lease terms is on the rise.
Meanwhile, state-level efforts to encourage conversions and expand housing supply are sometimes meeting local resistance. Restivo said that this tension between state policy and municipal authority could trigger more zoning appeals and related legal disputes as cities work to define the extent of their regulatory powers.
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