– Vatsal Rai
July 22, 2024
Introduction
IntroductionThe traditional image of office towers filled with sterile cubicles and empty hallways is being transformed. Globally, there’s a growing trend of adaptive reuse, repurposing old office buildings into stylish apartments, chic hotels, and lively mixed-use spaces.[3] This movement is influenced by changing city landscapes, urban development, sustainability efforts, the real estate market, urban renewal, office vacancy, and a desire for buildings with unique character.
Despite the clear appeal of turning underused buildings into popular residential and hospitality spaces, there are some challenges. Developers face strict building regulations, unexpected structural problems, and the need to meet modern living and travel standards. However, the potential benefits – environmental, economic, and aesthetic – are attracting more interest, making this trend in urban renewal one to watch closely.
This article will further explore this trend, detail the challenges involved, and highlight successful adaptive reuse projects that are revitalizing our urban environments and urban development.
Understanding the Challenge
Cities around the world are experiencing a notable rise in vacancy rates, a trend that has not only continued but worsened in the aftermath of the pandemic. The growing number of empty office spaces poses a multifaceted problem, affecting both economic stability and urban development.
Moody’s Analytics recently reported that the amount of empty office space in the United States has reached its highest level at 19.6% since 1979.[11] This surge is a lingering effect of the COVID-19 pandemic, as many employees have continued working remotely, leaving office buildings largely vacant, now dubbed “zombie towers.”
These vacancies have significant economic repercussions. Underutilized properties lead to declining property values and a shrinking tax base, which in turn hampers the funding for essential municipal services. On a societal level, vacant buildings contribute to urban blight, discouraging investment and development in nearby areas. For the commercial real estate (CRE) market sector, this trend highlights the urgent need for innovative solutions to rejuvenate these spaces and restore their economic and social value.
Adaptive Reuse – Conversion to Residential Spaces
United States has fallen short by approximately 5.5 million housing units over the past two decades, according to the National Association of Realtors, as construction has not kept pace with demand.[1] According to Jones Lang LaSalle (JLL), a global real estate services firm, over 20 percent of office spaces are unoccupied across the country, with certain cities experiencing even higher rates. For instance, San Francisco’s office vacancy rate recently soared to almost 32 percent.[2] By the end of 2020, the U.S. faced a shortage of 3.8 million housing units. Rental vacancy rates hit their lowest levels in decades, and 45 percent of renters were strained by allocating over 30 percent of their income to housing costs.[5]
This is where a promising solution to both the housing shortage and the empty downtown offices comes in – ‘adaptive reuse’ to convert these vacant office spaces into residential units. Cities such as New York, Chicago, and Cleveland are adopting this strategy and offering incentives to encourage the transformation. According to research conducted by RentCafe, a subsidiary of the real estate software company Yardi Systems, 2021 saw a record 43 percent increase in such conversions across the country, resulting in the creation of 11,090 new apartments.[4] The Biden administration is also supporting this effort with federal programs and tax incentives, while local authorities are streamlining changes to zoning and construction regulations.
Fig. 1 – Top building types converted to Apartments in 2022
Converting empty office buildings into apartments and condos has emerged as a practical solution to the growing vacancy rates in urban areas. This trend, fueled by the aftermath of the COVID-19 pandemic and urban development, addresses both the surplus of unoccupied office spaces and the increasing demand for residential housing in city centers, contributing to urban renewal
Benefits & Challenges
Transforming office buildings into residential units offers numerous benefits. Economically, it revitalizes underutilized assets, boosting property values and stabilizing the tax base, which supports essential municipal services. This conversion also aids in the real estate market and urban renewal, while creating job opportunities in construction and renovation to further stimulate local economies.
From a social perspective, repurposing office buildings can significantly enhance urban livability. It helps mitigate the issue of urban decay by breathing new life into dormant structures, making neighborhoods more vibrant and attractive. Increased residential density in city centers can support local businesses, promote public transportation use, and reduce urban sprawl, contributing to more sustainable urban development and urban renewal.
However, converting office spaces to residential units is not without challenges. Office buildings are typically designed with different layouts and infrastructure compared to residential properties. This can necessitate extensive and costly renovations to meet residential building codes and standards, including adjustments to plumbing, electrical systems, and the creation of livable floor plans. Additionally, there are regulatory hurdles and zoning laws that must be navigated.
Despite these challenges, the trend of converting offices to apartments and condos is gaining traction. It represents a strategic response to shifting urban dynamics, offering a sustainable path forward for cities grappling with high vacancy rates and the need for more housing. By repurposing these spaces, cities can create a more resilient and adaptable urban landscape.
Top Cities Leading by Example
New York City is facing a significant challenge with its empty office buildings, which have a 22% vacancy rate, equivalent to over 40 Chrysler Building-sized skyscrapers sitting unoccupied.[6] This is a major concern as the office sector has traditionally contributed 21% of the city’s property taxes.[6] To address this, city officials are proposing the conversion of these vacant office spaces into affordable housing units, a response to the persistence of remote work post-pandemic. On Thursday, August 17, 2023, Mayor Eric Adams and Dan Garodnick, director of New York’s Department of City Planning, unveiled the next steps of their “City of Yes for Housing Opportunity” initiative at a news briefing. This plan aims to create up to 20,000 homes for 40,000 residents, in response to the escalating housing crisis. Mayor Adams has already pledged $24 billion towards the development of affordable housing.[7]
Fig. 2 – Top 10 Cities by Most Converted Apartments in 2022
Los Angeles has been a pioneer in adaptive reuse. In 1999, the city enacted a law allowing developers to convert buildings from 1974 or earlier into residential units in the downtown area, leading to the creation of 12,000 housing units over 15 years.[8] Now, the Planning Department is working on a new ordinance to extend adaptive reuse citywide to properties 15 years or older. With leasing activity down 37% in the first quarter of 2023 compared to the previous year and office availability at a record high, the city faces a significant challenge. About 44 million square feet of office space, or 26.2% of the market, is vacant or soon-to-be-vacant.[8] Meanwhile, the downtown area suffers from a severe housing shortage, exacerbating homelessness. Adaptive reuse development offers a solution. A recent study suggests Los Angeles County could create up to 113,000 residential units downtown by converting underutilized hotels, offices, and other commercial buildings.[9]
Chicago faces a similar issue with empty office buildings, posting a 22.4% vacancy rate in downtown office space in the first quarter of 2023.[8] With 23% of office loans maturing in the next two years, the situation could worsen quickly without intervention. Converting office buildings could provide 1,000 new housing units, reducing LaSalle Street’s 5 million square feet of vacant commercial space.[10] Chicago plans to create 2,454 apartments from office conversions in the coming years, with about 70% of these units coming from repurposed office spaces— a higher proportion than in Los Angeles and New York City.[8]
San Francisco faces a significant issue with its empty and underutilized office buildings. The rise of remote work has sharply decreased office demand, causing vacancy rates to soar from a pre-pandemic norm of 7% in 2019 to as high as 28% in some downtown areas. Additionally, the occupancy rate has plummeted to a mere 44%.[8] To address this problem, the city is implementing legislation that simplifies the conversion of the commercial real estate market into residential space. The Office of Economic and Workforce Development and the San Francisco Planning Department are seeking proposals from downtown building owners and developers interested in transforming these underused commercial spaces into housing or other innovative uses. Streamlining the permitting process will enable developers to utilize vacant spaces effectively while helping to alleviate the housing crisis.
Conclusion
The adaptive reuse of vacant office buildings into residential spaces represents a promising solution to two pressing urban challenges: the surplus of empty commercial real estate market and the shortage of affordable housing. This trend, accelerated by the COVID-19 pandemic and the shift towards remote work, offers numerous benefits for cities and their residents. By breathing new life into underutilized structures, adaptive reuse projects can revitalize urban areas, boost local economies, and create much-needed housing options in desirable locations.
However, the path to successful conversion is not without obstacles. Developers and city planners must navigate complex regulations, overcome structural challenges, and ensure that converted spaces meet modern living standards. Despite these hurdles, cities like New York, Los Angeles, Chicago, and San Francisco are leading the way with innovative policies and incentives to encourage office-to-residential conversions.
As we look to the future of our urban landscapes, adaptive reuse emerges as a sustainable and creative approach to urban development. It not only addresses immediate housing needs but also contributes to more vibrant, diverse, and resilient city centers. The success of these projects will depend on continued collaboration between government officials, developers, and community stakeholders. With thoughtful planning and execution in the realms of urban development, adaptive reuse, the real estate market, urban renewal, and addressing office vacancy, the transformation of empty offices into thriving residential spaces has the potential to reshape our cities for the better, creating more livable urban environments that meet the evolving needs of their inhabitants.
References
[1] Bahney, Anna. 2024. “Can We Turn All Those Empty Office Buildings into Housing? | CNN Business.” CNN. January 13, 2024. https://www.cnn.com/2024/01/13/business/can-we-turn-empty-office-building-into-housing/index.html.
[2] Johnson, Cornell SC, and Janice Endresen. 2023. “Adaptive Reuse: Is Converting Empty Office Space to Housing Viable?” Cornell SC Johnson. July 6, 2023. https://business.cornell.edu/hub/2023/07/06/adaptive-reuse-converting-empty-office-space-housing-viable/.
[3] Advisor, Your Coworking. 2024. “Vacancy to Viability: The Coworking Model as a Solution for Empty Office Buildings.” CoworkingConsulting.com. March 3, 2024. https://coworkingconsulting.com/vacancy-to-viability-the-coworking-model-as-a-solution-for-empty-office-buildings/.
[4] Sisson, Patrick. 2022. “Getting Creative with Vacant Office Space: Storage, Gym, Film Set.” The New York Times, December 27, 2022, sec. Business. https://www.nytimes.com/2022/12/27/business/office-space-glut-reuse.html.
[5] “Transforming Empty Offices into Homes | Informed Infrastructure.” n.d. Accessed July 22, 2024. https://informedinfrastructure.com/92625/transforming-empty-offices-into-homes/.
[6] “Converting Empty Offices: 4 Cities with the Most Office Conversions.” n.d. Www.linkedin.com. Accessed July 22, 2024. https://www.linkedin.com/pulse/converting-empty-offices-4-cities-most-office-conversions.
[7] “NYC Rolls out Plan to Convert Empty Office Buildings into 20,000 Homes as Remote Working Persists | Business Insider India.” n.d. Business Insider. Accessed July 22, 2024. https://www.businessinsider.in/thelife/news/nyc-rolls-out-plan-to-convert-empty-office-buildings-into-20000-homes-as-remote-working-persists/articleshow/102951150.cms.
[8] Catalano, Don. n.d. “Converting Empty Offices: 4 Cities with the Most Office Conversions.” Www.ioptimizerealty.com. Accessed July 22, 2024. https://www.ioptimizerealty.com/blog/converting-empty-offices-4-cities-with-the-most-office-conversions?trk=article-ssr-frontend-pulse_little-text-block.
[9] “Hotels, Offices Could Provide LA County with 72,000 New Homes, Study Finds.” 2022. Daily News. April 6, 2022. https://www.dailynews.com/2022/04/06/hotel-office-conversions-could-provide-la-county-with-at-least-72000-new-homes-study-finds/.
[10] “La Salle Street Is Getting 1,000 New Apartments, but First Comes Navigating Conversions and Code.” 2024. Chicago Sun-Times. June 22, 2024. https://chicago.suntimes.com/real-estate/2024/06/22/lasalle-street-apartments-office-adaptive-reuse-tif-johnson.
[11] Morris, Chris. n.d. “Office Buildings Haven’t Been This Empty since (at Least) 1979—and Texas Is Taking It on the Chin the Most.” Fortune. Accessed July 22, 2024. https://fortune.com/2024/01/08/office-buildings-hit-forty-year-high-vacancy/.