Office-to-Residential Conversions: A Billion-Dollar Trend Shaping Urban Landscapes
The transformation of office buildings into residential properties is gaining momentum, exemplified by a $1 billion venture spearheaded by Dune Real Estate Partners and developer TF Cornerstone. This initiative, discussed here recently on CNBC’s Squawk Box with Dune Real Estate Partners CEO Dan Neidich, highlights the evolving dynamics of urban real estate amid shifting market demands.
South Florida has not experienced the emptying out of office properties that some markets have during and then continuing after the COVID-19 pandemic. Thus, this type of redevelopment is happening little, if at all, in the Miami area.
The Trend Gaining Traction
Office-to-residential conversions have long been discussed as a solution to urban housing shortages and declining demand for office spaces. However, execution has been a sticking point. According to the segment, these conversions are already underway on a significant scale. Since 2000, over 50,000 residential units have been created through such projects nationwide. In New York City alone, 18 million square feet of office space is currently undergoing some stage of conversion, solidifying the city as a “poster child” for this trend.
The Distressed Office Market as a Catalyst
Dune Real Estate’s CEO emphasized that much of this opportunity is driven by distressed “B” and “C” office buildings, which are no longer viable in today’s hybrid work environment. For many of these properties, banks play a pivotal role as stakeholders in distressed assets, given that equity and mezzanine loans often no longer hold value.
“There’s somewhat of an unlimited opportunity in distressed B and C office buildings,” the CEO explained, citing reduced demand for subprime office spaces as companies prioritize high-end, amenity-rich environments to attract employees.
Public-Private Collaboration as a Driver
Government incentives are crucial to the feasibility of these conversions. For instance, New York’s recent tax abatement legislation, offering 30 to 35 years of tax benefits for eligible projects, underscores public support for adaptive reuse. These measures, combined with streamlined entitlement processes, are making conversions more attractive than traditional new construction.
Economic and Design Benefits
Office-to-residential conversions offer compelling economics, often allowing developers to deliver housing at approximately 80% of replacement costs. This cost efficiency stems from reusing existing infrastructure, foundations, and in many cases, saving time on entitlement processes. Additionally, these conversions can yield superior design outcomes, such as higher ceilings and unique architectural features that would be prohibitively expensive in new builds.
The Challenges
Despite the promise, challenges remain. Factors like elevator placement, natural light, and water access can make some office buildings unsuitable for conversion. However, the CEO noted that with the right acquisition price, even complex projects can become viable. Extreme measures like cutting structural holes, while expensive, may still be justified for buildings with no alternative future.
A Solution to Urban Housing Needs
The shift to residential use not only revitalizes underutilized office spaces but also addresses critical housing shortages in major cities. This transformation aligns with urban sustainability goals by repurposing existing structures rather than pursuing energy-intensive demolitions and rebuilds.
Conclusion
The office-to-residential conversion trend is reshaping urban real estate. With increasing public and private sector collaboration, cities like New York are leading the charge, leveraging this strategy to address housing shortages and revitalize urban cores. As the market for distressed office buildings expands, the opportunity for adaptive reuse continues to grow, proving that even outdated properties can find new life with innovative approaches.