{"id":172468,"date":"2024-05-27T08:16:32","date_gmt":"2024-05-27T14:16:32","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=172468"},"modified":"2024-05-27T08:17:11","modified_gmt":"2024-05-27T14:17:11","slug":"commercial-spaces-are-being-converted-into-151k-residential-apartments-nationwide-in-2024","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/commercial-spaces-are-being-converted-into-151k-residential-apartments-nationwide-in-2024","title":{"rendered":"A Massive Commercial to Residential Conversion is Taking Shape Nationwide\u2014Here&#8217;s What Investors Should Know"},"content":{"rendered":"\n<p><span data-preserver-spaces=\"true\">From the boardroom to the bedroom, faced with empty offices as remote employment continues to starve cities of workers, a massive nationwide repurposing is underway to transform workplaces into residential spaces.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">According to a report by&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.rentcafe.com\/blog\/rental-market\/market-snapshots\/adaptive-reuse-apartments\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">RentCafe<\/span><\/a><span data-preserver-spaces=\"true\">, &#8220;adaptive reuse&#8221;\u2014the term for this process\u2014will see 151,000 new apartments take shape this year, up from 122,000 last year, representing a 24% increase and a 17.6% increase from the year before.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The trend is much needed to stop building owners from going broke and cities from losing much-needed tax revenue. A study completed in November 2022 by researchers at the NYU Stern School of Business and Columbia University estimated a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/papers.ssrn.com\/sol3\/papers.cfm?abstract_id=4124698\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">$664.1 billion reduction<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;in real estate asset values from continued&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/the-real-world-impacts-on-remote-work-and-what-it-did-for-investors\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">remote work trends<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">New York and LA Head Conversions<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Most of that number involves repurposing hotels\u2014<\/span><span data-preserver-spaces=\"true\">an easier<\/span><span data-preserver-spaces=\"true\">&nbsp;transformation than remaking office spaces, which are also being converted, with Manhattan leading the charge. A small number involve converting industrial buildings such as factories. By far, the largest project in Manhattan is 525 Lexington Avenue. The building now houses 655 student apartments.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Los Angeles has 5,881 units scheduled for conversion this year, while Manhattan has 4,363. Office conversions are at the top of many cities&#8217; agendas. Because of the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.pbs.org\/newshour\/economy\/analysis-heres-what-it-would-take-to-turn-empty-office-buildings-into-residential-housing#:~:text=With%20a%20conversion%20to%20multi,countertops%20and%20light%20fixtures%20are.\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">additional considerations<\/span><\/a><span data-preserver-spaces=\"true\">, such as windows, plumbing, and electrical revisions, office conversions take longer than hotel conversions. However, they are still considered an environmentally friendly alternative to razing buildings and starting from scratch.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">&#8220;The process minimizes the environmental impact associated with demolition and the production of new materials, making it an eco-friendly approach to design and construction,&#8221; Doug Ressler, manager of business intelligence at commercial real estate data firm Yardi Matrix, said in the press release about the RentCafe report. &#8220;Although these [office] buildings pose challenges for conversion into residential spaces due to factors like building age, size, configuration, and location, repurposing them helps alleviate the shortage of rental units at diverse price points, especially in areas where vacant or underused buildings are prevalent.&#8221;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Tax Revenue, Housing, and Vitality<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The immediate advantages of additional city residential spaces include:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">More tax revenue.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Vibrant 24\/7 communities.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Booming business for nearby restaurants and businesses.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">A much healthier urban ecosystem.<\/span><\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">About&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.huduser.gov\/portal\/periodicals\/em\/fall-23\/highlight1.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">11%<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;of U.S. office buildings are good candidates for conversion, but one&nbsp;<\/span><span data-preserver-spaces=\"true\">of the prohibitive issues<\/span><span data-preserver-spaces=\"true\">&nbsp;is expense. The resultant apartments or condos would need to be high-end to pay for the undertaking<\/span><span data-preserver-spaces=\"true\">. This<\/span><span data-preserver-spaces=\"true\">&nbsp;would do nothing to alleviate the affordability crisis many cities are facing.<\/span><span data-preserver-spaces=\"true\">&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">However, a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.smartcitiesdive.com\/news\/office-to-residential-conversion-costs-30-lower-new-construction\/700448\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">study from Gensler<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;indicates that office conversions are less than one-third of the cost of new construction. Couple this with developer incentives, such as new&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.congress.gov\/bill\/117th-congress\/house-bill\/4759\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">legislation<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;that provides a 20% credit for qualified property conversion expenditures with developers\u2014providing at least 20% of the resulting units are affordable housing to qualify\u2014and large-scale office conversions could provide a way to revitalize city centers, offering much-needed affordable housing in the process.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Benefit for Real Estate Investors<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">In the short term, the additional tax revenue allows cities to function better. It means residential landlords in the city boroughs won&#8217;t see a spike in their real estate taxes, and essential city services such as sanitation, police, education, and fire departments will be better funded, making cities better places to live. Also, adding affordable, much-needed inventory to the market could stabilize and even decrease exorbitant, escalating prices, allowing more people to&nbsp;<\/span><span data-preserver-spaces=\"true\">get onto<\/span><span data-preserver-spaces=\"true\">&nbsp;the housing ladder and create more well-balanced cities of full-time residents.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In the long term, as cities become desirable places to live and socialize, as has happened in cities like&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/detroit-beats-post-pandemic-downtown-doom-loop\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">Detroit<\/span><\/a><span data-preserver-spaces=\"true\">, the knock-on effect benefits the entire&nbsp;<\/span><span data-preserver-spaces=\"true\">city<\/span><span data-preserver-spaces=\"true\">, resulting in appreciating real estate values.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Investing in City Condos&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Investing in condos is an excellent strategy for passive income.&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.nar.realtor\/blogs\/economists-outlook\/april-2024-existing-home-sales-take-a-step-back\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">According to the National Association of Realtors<\/span><\/a><span data-preserver-spaces=\"true\">, the median sales price of single-family homes rose 5.6% to $412,100 from April 2023, while the median sales price of condominiums increased 5.4% to $365,300.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Though city condos could be pricier than they are elsewhere, the fact that owners pay a maintenance fee means the public areas of the building and grounds and amenities are well maintained, saving an investor the headaches associated with single-family homes. As with other real estate types, condos appreciate while providing&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/rental-property-cash-flow-analysis\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">cash flow<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;and tax breaks.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The downside of condos is that because of the minimal upkeep, overseas investors often buy them in all-cash deals as a haven to park their money while living elsewhere, leaving many buildings half-occupied.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The Big Picture<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">According to commercial real estate brokerage<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.us.jll.com\/en\/trends-and-insights\/investor\/why-investors-are-banking-on-conversions\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">&nbsp;JLL<\/span><\/a><span data-preserver-spaces=\"true\">, repurposing office buildings for residential and other in-demand uses could provide a windfall for commercial real estate investors. Indeed, 90% of global real estate investors believe a former office&#8217;s best&nbsp;<\/span><span data-preserver-spaces=\"true\">uses would be<\/span><span data-preserver-spaces=\"true\">&nbsp;residential assets.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Other uses mentioned include:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Industrial storage and data centers<\/span>.<\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Hospitality and leisure<\/span>.<\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Student or senior housing<\/span>.<\/li>\n<\/ul>\n\n\n\n<p><span data-preserver-spaces=\"true\">That said, assuming&nbsp;<\/span><span data-preserver-spaces=\"true\">the construction aspect of a conversion could be achieved<\/span><span data-preserver-spaces=\"true\">, financial hurdles could&nbsp;<\/span><span data-preserver-spaces=\"true\">still<\/span><span data-preserver-spaces=\"true\">&nbsp;pose a problem.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">&#8220;If an office was acquired using an office-specific investment fund, pivoting to a different use often requires first selling the property and securing alternative financing,&#8221; Raphaelle Bour,&nbsp;<\/span><span data-preserver-spaces=\"true\">lead project manager of Work Dynamics<\/span><span data-preserver-spaces=\"true\">, said on the JLL website.<\/span><span data-preserver-spaces=\"true\">&nbsp;Noting the number of cities getting on board with tax incentives and zoning allowances, Bour added: &#8220;Policymakers are also simplifying previous conversion hurdles, hoping to reduce the number of stranded assets whose upgrade costs outweigh their worth.&#8221;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Value-Add Propositions of Older Buildings Can Offset Risk&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">&#8220;There&#8217;s an opportunity for investors to acquire vacant office buildings, structure the repurposing, and establish new operators,&#8221; says Bour. &#8220;They can then offer assets to the market with, say, a decade of secure cash flow,&nbsp;<\/span><span data-preserver-spaces=\"true\">something<\/span><span data-preserver-spaces=\"true\">&nbsp;which is currently in high demand\u2014and many large investors are creating diversified funds for this type of operation.&#8221;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Repurposing office buildings offers&nbsp;<\/span><span data-preserver-spaces=\"true\">opportunities for both<\/span><span data-preserver-spaces=\"true\">&nbsp;smaller residential and more prominent&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/commercial-real-estate-fundamentals\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">commercial investors<\/span><\/a><span data-preserver-spaces=\"true\">.<\/span><span data-preserver-spaces=\"true\">&nbsp;For owners of small&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/finding-multifamily-properties\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">multifamily<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;buildings, a big city&#8217;s ongoing healthy social and financial ecosystem means a plentiful supply of tenants, the upkeep of essential services, and increasing housing values.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/passive-real-estate-investing\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">passive investors<\/span><\/a><span data-preserver-spaces=\"true\">, the supply of new condos to the market offers the opportunity to invest in a hands-off, appreciating asset. Depending on your city&#8217;s&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/the-ultimate-guide-to-short-term-rental-properties\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">short-term rental<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;rules, this asset could be used as an Airbnb, allowing you to stay in your residence when you are in town.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For larger-scale investors and syndications, the myriad of potential adaptive uses for older office buildings means that not only will there be financial benefits for a value-added proposition, but also the chance to choose a future-proof, in-demand business such as a data center that is not tenant-dependent and thus less risky than relying on constant upkeep, monthly rents, and high occupancy numbers.&nbsp;<\/span><\/p>\n\n\n\n    \n  <div id=\"visibility-group-block_400e33d67bac67d56e23db4eae0147b3\" class=\"visibility-group alignwide  hidden\">\n        \n\n<div id=\"hero-block_3ea6caa0cab3b168a668c4cd6e5fdcc3\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Get a Better Tax Strategy Now<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:18px\">Connect with<strong><em> real estate<\/em><\/strong><em> <\/em><strong><em>investor-friendly <\/em>tax pros <\/strong>who create thriving, tax-efficient portfolios.<\/p>\n\n\n\n<div id=button-custom-event-block_61e10330ddd036d62797fe9c4ee09846 class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/business\/finder\/tax-and-financial-services\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Agent Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/commercial-spaces-are-being-converted-into-151k-residential-apartments-nationwide-in-2024&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Find a Tax Pro<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2024\/04\/Marketplace-Blog-Blocks-FinServ_Tax.png\" alt=\"investor-friendly CPAs, tax professionals, and financial planners\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  ","protected":false},"excerpt":{"rendered":"<p>From the boardroom to the bedroom, faced with empty offices as remote employment continues to starve cities of workers, a massive nationwide repurposing is underway to transform workplaces into residential [&hellip;]<\/p>\n","protected":false},"author":613725,"featured_media":172471,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8],"tags":[],"class_list":["post-172468","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-trends"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/172468","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613725"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=172468"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/172468\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/172471"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=172468"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=172468"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=172468"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}