Chapter 5
The Conversion Potential
Shaping Tomorrow’s Cities: Fostering Resilient and Vibrant Urban Environments
5 Minute Read
U.S. downtown markets have been particularly challenged by struggling Non-Prime Business districts. Since the COVID-19 pandemic, vacant office space in U.S. downtowns has increased by approximately 136 million sq. ft., more than the entire downtown office inventory of Washington, D.C. CBRE Econometric Advisors forecasts that vacant downtown space will increase by an additional 16 million sq. ft. before plateauing in 2025. Although office supply and demand will eventually become balanced, there still will be a sizable amount of commodity space that remains vacant.
The downtown office vacancy rate is expected to exceed the long-term average through 2029.
Figure 25: U.S. Downtown Office Vacancy by Type
Source: CBRE, CBRE Econometric Advisors, 2024.
Current State of Conversion Activity
The conversion of approximately 25 million sq. ft. of downtown office space—84% of it to multifamily use—was either planned or underway in the 19 focus markets as of Q1 2024. Even if all these conversions are completed, they would reduce downtown office inventory by only 2% and would not lower the overall vacancy rate to long-term averages.
Dallas currently has the highest share of downtown office inventory under conversion, which will help to reduce its vacancy rate of approximately 30%. A confluence of high office vacancy and burgeoning population growth in Dallas has driven conversions, particularly to multifamily uses. These conversions will play a key role in facilitating a more walkable, vibrant downtown.
San Francisco, which has the highest vacancy rate among the 19 markets, has the third-lowest share of office inventory under conversion. Current office building prices, coupled with high construction costs, make most office conversions in the city prohibitively expensive without financial incentives or subsidies.
Conversion of downtown office buildings is not the only strategy that should be employed to boost market vitality. Converting underutilized buildings in inner-ring suburbs, especially those adjacent to public transit, can reinvigorate those areas. The resultant increase in population that can easily access the nearby urban core can help activate and revitalize the downtown as well.
Texas markets have the most office conversions planned or underway.
Figure 26: Planned/Underway Downtown Office Conversions
Source: CBRE, 2024.
CBRE baseline forecasts assume that the percentage of existing inventory that is converted, demolished or otherwise removed will remain in line with historical levels. However, if conversions exceed these levels, those markets with high conversion activity, as well as the overall U.S. office market, could recover sooner than expected.
A rise in conversion activity is a logical approach to revitalizing U.S. downtowns. Growing the supply of affordable housing would attract more people to live in urban areas that may currently be prohibitively expensive. Adding more residential units also increases demand for retail and other local services, as well as the overall vibrancy of a downtown—key ingredients of successful live-work-play neighborhoods. Additionally, converting a building to its highest and best use will help boost its value and therefore tax revenues for the municipality. But conversions aren’t without a slate of challenges, including the cost of capital, a tight lending environment, zoning restrictions and relocating existing office tenants. These and other challenges are major reasons why only a relatively small number of conversions are currently underway, despite weak office market fundamentals.
Targeted Opportunities
Office conversions will occur whenever warranted by underlying economic and physical conditions. We believe that these projects will be most successful in and near already-vibrant locations that can attract prospective residents. The most obvious candidates for conversion are struggling buildings in great locations.
There is more than 43 million sq. ft. of Class B and C office space* in “zombie buildings” (those with vacancy rates of more than 50%) that are in or near Vibrant Mixed-Use districts in the downtowns of our 19 focus markets. This is nearly nine times the office square footage currently under conversion in these markets and presents the potential for approximately 43,500 new 1,000-sq. ft. residential units. If all existing tenants in these buildings relocated to nearby office properties of similar quality, the Class B/C vacancy rate in these markets would decrease to historical averages. Although it is unlikely that all relocating tenants would lease an equivalent amount of space, this leasing activity, coupled with removing the struggling buildings from office inventory, could help bring supply and demand closer to equilibrium.
Vibrant Mixed-Use districts and adjacent areas have more than 43 million sq. ft. of “zombie” Class B/C office space.
Figure 27: Downtown Office-to-Multifamily Conversions and Opportunity in Vibrant Mixed-Use Districts
Source: CBRE, CBRE Econometric Advisors, 2024.
Conversions of downtown office buildings are just one element of a holistic plan to revitalize cities. Not all high-vacancy Class B and C buildings will be converted, whether due to an unsuitable physical structure or a lack of financial feasibility. Some of these may remain office buildings for a long time, albeit in repositioned, upgraded form. In other cases, cities should reconsider existing land uses and building codes and, as a last resort, incentivize demolitions of obsolete buildings to create opportunities for ground-up construction or green community-gathering spaces. Among all planned and underway office reuse projects currently tracked by CBRE, 24% are demolitions to make way for new development. This course of action can be environmentally challenging and should be considered alongside sustainability targets. Conversions of underutilized, transit-adjacent commercial properties to densify close-in communities can bolster vibrancy of the broader metro area and promote more mobility and access between the urban core and nearby urban and suburban areas.
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