Strong Office Conversion Pipeline Will Boost Business-Centric Downtowns

Office conversions have had a banner year to date in 2024, with 73 of them already completed and another 30 scheduled for delivery by year-end—the most since CBRE began tracking conversion projects in 2016.

Much of this activity is being driven by historically high office vacancy rates and falling asset values, prompting public/private partnerships that are incentivizing conversions. The pipeline of office conversions is expected to grow as cities offer more incentives and sellers of troubled assets further discount prices, particularly for older buildings.

As of Q3 2024, 71 million sq. ft. or 1.7% of U.S. office inventory was planned for or already undergoing conversion. This is the same amount of conversion activity as in Q1 2024, despite the completion of 45 projects totaling 7 million sq. ft. since then—an indication that the conversion pipeline is replenishing as projects are finished.

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

Demand for multifamily units, particularly in tight downtown housing markets, has motivated developers to convert largely vacant office buildings. The overall downtown multifamily vacancy rate was just 5.3% in Q3, compared with the downtown office vacancy rate of 19.6%. Average multifamily rent has increased by 22% since 2020 vs. just 1% for average office rent.

Office-to-multifamily accounted for nearly three-quarters of planned or underway conversion projects in Q3, up from 63% in Q1. Since 2016, office-to-multifamily conversions have increased U.S. multifamily supply by 28,000 units. Another 38,000 will be added if all projects currently planned are completed.

Office conversions to other property types, particularly life sciences, have waned from pandemic-era years when new construction could not keep pace with strong demand. The life sciences share of office conversion projects fell by 13 percentage points over the past year to 6%.

Figure 2: Property Type Share of Underway & Planned Office Conversions

The conversion of largely vacant office buildings is helping cities transform certain neighborhoods into thriving economic centers where people want to gather. CBRE’s recent Shaping Tomorrow’s Cities analysis classifies U.S. districts by five types: Vibrant Residential, Vibrant Mixed-Use, Prime Business, Non-Prime Business and Mixed-Use. The study found that vibrant mixed-use districts, which are composed of prime office buildings, plentiful multifamily housing and walkable retail, dining and entertainment options, had lower office and apartment vacancy rates and higher asking rents than their business-centric counterparts.

Since 2020, 42% of completed office conversion projects and 52% of currently planned or underway conversions were in business-centric districts. As office demand shifts away from these areas, a resultant increase in conversion activity should eventually transform them into new vibrant mixed-use districts.

Largely vacant older office properties within or adjacent to existing vibrant mixed-use districts can also be good candidates for conversion. Five million sq. ft. of office space in such districts has been converted to other uses since 2020 and 17 million sq. ft. more is currently planned or underway. Successful conversions, particularly to hotel and multifamily, can bolster the vibrancy of these districts.

Figure 3: Share of Office Conversions by District Type

Office conversion activity varies by market, as local factors such as building values, age of inventory, building size and construction costs influence project viability. Cleveland is the top U.S. market for conversions, with nearly 12% of its total office inventory either undergoing or planned for conversion. Cleveland’s relatively high construction costs and low office rents, combined with limited available land, pushed local developers to pursue conversions well before the pandemic.

In several major gateway markets like Washington, D.C., Dallas-Ft. Worth and Chicago, 2% or less of their total office inventory is currently undergoing or planned for conversion. Conversions to residential can help transform some of these markets’ business-centric districts into vibrant mixed-use centers over time but are not expected to significantly impact broader market dynamics.

In Chicago, municipal support for transforming underutilized business-centric districts into vibrant mixed-use centers led to the creation of LaSalle Street Reimagined. Financial incentives offered by the city have helped to create one of the densest clusters of office conversion projects in any major U.S. market.

Figure 4: Top Markets for Underway & Planned Conversions as Percentage of Total Office Inventory

As cities continue to position themselves for a strong, resilient future, many are removing barriers to repurposing obsolete office space. Offering financial incentives, easing zoning restrictions and expediting project approvals will help facilitate this much-needed evolution of American cities.