Rise in Office Conversions May Help to Reinvigorate Cities

A more than doubling of office-conversion projects this year may start to refuel urban economies that are suffering from less demand for older, often obsolete office buildings after the pandemic-induced shift to hybrid working.

Approximately 100 office-conversion projects—nearly half of them to multifamily—are expected to be completed in major U.S. cities this year, compared with the annual average of 41 between 2016 and 2022.

Figure 1: Office Conversions by Construction Status & Estimated Year of Completion

Source: CBRE Research, Q3 2023.

There currently are 60 million sq. ft. of office conversions planned or underway, comprising 1.4% of total U.S. office inventory—up from 1.2% in Q4 2022.

Office-to-multifamily comprise 48% of conversion projects currently underway or planned, followed by office-to-life-sciences at 19%. Since 2016, 110 office-to-multifamily conversion completions have created nearly 20,000 housing units. The 118 such projects currently planned or underway are estimated to produce an additional 21,000 units.

Office-to-mixed-use comprise 18% of ongoing or planned conversion projects, compared with just 7% of conversions completed since 2016. Redeveloping obsolete office districts into vibrant, mixed-use centers that combine multifamily, retail, hotel and upgraded office space can help boost city economies.

Other property types, such as hotel and industrial, represent a much smaller share of office conversion projects since they have higher costs and greater logistical challenges. Additionally, demand has moderated for these property types following the pandemic-era boom, necessitating a need for fewer such conversions.

Figure 2: Underway/Planned Office Conversions by New Property Type

Source: CBRE Research, Q3 2023.

Markets with a relatively high number of older office buildings have the most office conversions planned or underway. Cleveland has the highest percentage of its total office inventory (11%) either currently under conversion or planned, while Boston has the most total square footage (6.1 million). Seven of the top 10 markets for conversion activity have an office vacancy rate higher than the 18.2% U.S. average as of Q2 2023.

Figure 3: Top 10 Markets for Planned/Underway Conversions as Percentage of Total Office Inventory

Note: Data labels indicate total square footage of conversions planned or underway.
Source: CBRE Research, Q3 2023.

Many state and local governments have incentive programs for office conversion projects. The federal government has also announced plans to incentivize local jurisdictions to reduce land-use and zoning restrictions for office-to-residential conversions, particularly for affordable and zero-emissions housing, and to provide financing mechanisms to build and preserve more housing. This government assistance is intended to make the conversion process more financially feasible for private developers and to address the acute need for more affordable housing.

Conversions alone cannot resolve the challenges facing the U.S. office market. As long as interest rates remain high, fewer projects will get going. Cities that have financial incentive plans to transition obsolete buildings into newer and better uses will help transform older office districts into vibrant mixed-use centers that occupiers and consumers desire.