Recently, the commercial real estate industry has faced many headwinds, including rising office vacancies and housing shortages. As these two challenges persist, a potential opportunity has been a frequent topic of investor conversation: converting office buildings into residential properties. This blog post delves into office-to-residential conversions, echoing the insights from our latest white paper on this trend.
Key Issues for Office-to-Residential Conversions
Some of the primary considerations for an office-to-residential conversion project include:
- Low cost-basis, as the redevelopment project will require significant capital investment
- Favorable supply-and-demand fundamentals for the proposed use in a particular market, sub-market, and location
- Eventually complete vacancy in the building, with either a relatively short lease term to wait out expiring leases, or lease termination agreements with existing tenants
- Small floor plates, which allow for sufficient natural light and outside air in bedrooms to comply with building code requirements or preferences from prospective tenants
- Flexible zoning regulations
Choosing the Right Partners: Investment Managers
Key factors to consider when selecting an investment manager include a proven track record of successful projects, local knowledge, robust underwriting skills, references from previous investors or partners, an alignment of interests with investors, and strong risk management processes.
Real-World Examples
Two case studies that exemplify the potential of office-to-residential conversions are summarized below:
Hines’ South Temple Tower in Salt Lake City, UT
- A 217,000-square-foot office property with an opportunity to transform the office space into a 221-unit multi-family building
- A dedicated team with expertise in various construction areas and located in a city with flexible zoning
- Sustainability efforts include reusing existing structures and implementing energy-efficient systems
- Cautious approach to underwriting costs and construction timeline
- Completion expected in 2025
Rockwood’s 25 Water Street in New York City
- A 22-story, 1.1 million-square-foot office building to be converted into 1,200 multi-family units
- Located in the heart of the Financial District
- Emphasis on increasing space available for housing during redesign process related to sustainability efforts
- Key construction challenges related to floorplate size and replacement of facade
- Completion expected in 2025
Office-to-residential conversions offer one possible solution to the challenges posed by rising office vacancies and housing shortages. However, success hinges on the careful evaluation and selection of experienced investment managers. While only a small percentage of office buildings are suitable for conversion, creative solutions are emerging and growing to address housing shortages in cities across the United States.
Disclosures
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