Developers Eye Office Buildings as Residences

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Developers Eye Office Buildings as Residences

Daily Real Estate News | Thursday, August 20, 2015

A new trend is emerging in downtowns: Once empty, obsolete office buildings are increasingly being converted into apartments, the CoStar Group reports. Office-to-residential conversions have been popular in revitalizing some downtowns, particularly along the East Coast, but the trend is now rapidly expanding to Midwest markets.

Read more: Where the Next Office Boom Will Be

A survey by CoStar Portfolio Strategy market analysts shows that office-to-residential conversions in some of the nation's top office markets are adding about 11,500 multifamily units to downtown inventories.

"Office conversions are a huge trend we're seeing in a lot of places you wouldn't think about, including Kansas City, St. Louis, Milwaukee, and Cleveland," says Aaron Jodka senior manager, market analytics with CoStar Portfolio Strategy.

In Kansas City, Mo., for example, recent conversions slated are to remove 158,000 square feet of office inventory from the Plaza/Midtown, an area that's become a popular urban address for younger people who are looking for apartments, says Dennis Bradley, principal at B&A Architecture in Kansas City, Mo.

The conversion to apartments is occurring after the owner tried for two years to find a single-use office tenant to occupy a 60-year-old office building that is now being converted into 101 apartment units, including eight two-story penthouses.

Meanwhile, the losses of office inventory are expected to stir more ground-up office construction and leasing activity in other office buildings, the CoStar Group reports.

Source: "Office Today, Apts. Tomorrow: Office-to-Residential Conversions Expanding Access More U.S. CBDs," CoStar Group (Aug. 19, 2015)

Thanks for posting it is an interesting trend. It's not too surprising given the popularity or demand for downtown living these days. Most likely cheaper to convert office space rather than rebuilding . At the same time there is the trend of less people working in traditional offices . Article mentions the owner of the building tried for years to rent it as office space so that's a pretty clear sign demand is not what it was in the past . More people can work from home or coffee shops , etc versus the past due to the Internet .

Office vacancies in a lot of markets areas still high. I just saw a report that was saying 18%.

Of course there are markets like Washington that are heavily leased up but nationally it hasn't recovered fully yet.

I can see a lot of adaptive re-use like your article mentioned. Stuff sitting vacant the county and cities are anxious to get it performing in some capacity again. The developer might also gets credits to do the project.

I like medical office but office in general doesn't excite me much.

It is in the very beginning of it's up cycle in many markets so there is some value for investors that like that sector.

The reuse is much faster to get leased up and changed versus ground up development. With apartments it's a horse race of getting new product out there before the market gets saturated versus demand in a few years.

Washington vacancy is still pretty high, its a common misconception that offices there are full. In general, I view office as a flat growth asset class because of the way our businesses operate. Due to technology we can do more with less space and employees. Employees are also able to work remotely now. 

Yes, reuse is good, but take it from someone who has done a office to residential conversion, it certainly isn't a cake walk. The probably is with the piping and creating bathrooms per unit. Most offices only have one mens and one ladies common restroom on each floor. So the piping and planning costs a ton of money. The average cost to reuse relative to building is around 85%. That 15% margin may not seem like much, but it creates a great return on investment for a developer and plus as Joel mentions they get the product out quicker.