Can Suburban Office Renovation Help the Housing Crisis?

The U.S. faces an ongoing housing shortage, with the gap between supply and demand steadily rising. Near the end of 2023, a reported need for between 4.5 to 5 million homes stood in stark contrast to reports of only 1 million properties on the market. But the housing shortage is also paired with an affordability crisis where high-end residential projects are saturating market availability. Because of this, many Americans are finding it hard to obtain housing that is relatively close to where they work and at reasonable prices.

City Challenges: High Costs, High Rent

Leading voices throughout the industry agree that the problem of the lack of attainable residential housing cannot be solved solely with new construction projects for multifamily. Over the last few years, a different opportunity has caught the attention of developers. Enter—the empty office. The Houston Chronicle recently reported that Houston’s office vacancy rate sits at 25 percent, with similar data in other Texas regions like DFW and Austin.

In the hands of the right developers, a number of these spaces hold the potential for residential resurgence. These underutilized buildings pose an interesting prospect for office-to-residential conversions, but there are financial and structural challenges for developers and renters alike.

An office-to-residential conversion is costly, and not all buildings are good candidates for significant renovations. To start, the large and open floor plates of city office buildings built in the decades that surround 1970 hinder its separation into individual units. Specifically, there are sizable distances from exterior windows to the center of each floor, and its windows are usually fixed and inoperable. There are also substantial plumbing and electrical needs and staggering construction costs, in addition to the economic impact of higher interest rates.

In 2017, the architect at 180 Water Street in New York City’s financial district devised a plan to remove and repurpose the center portion of the building to work around the issue of large floor plates. Once a 457,000-square-foot office building, the coring resulted in a 1,200-square-foot courtyard and a reconfigured floorplan to accommodate residential units with fully replaced and operational windows. The cored out square footage was added to the top of the building as six additional floors and ultimately, more apartment units. By the end of the renovation, 82 percent of the square footage on residential floors was useable as rentable space.

Despite architectural hurdles, many downtown office buildings are following suit and being restored into places of residence for people who don’t mind the steep price tag. Good for the housing shortage. Not great for the affordability crisis.

Suburban Opportunities: Lower Costs, Lower Rent

If downtown buildings are not ideal candidates for an undertaking of this scale, what actually makes sense from a structural perspective? The untapped potential of underutilized space has some developers thinking outside the box – or in this case, outside the city. When you look beyond urban core areas, there may be a more practical and accessible solution that could balance both office-to-residential development and affordability concerns. An interesting contender is the suburban office building.

The prospect is that a suburban building could keep prices attainable for renters and put a dent in the housing crisis by revving up multifamily development. Land is generally less expensive in the suburbs than the cities. Also, the smaller footprint of suburban office buildings may have more amenable floor plates for residential conversion which inherently contributes to lower construction costs. From here, the expectation is that the project’s economics pencil out at lower rental rates than an urban conversion.

In Alexandria, Virginia, Urban Investment Partners recently acquired a 132,000 sq. ft. suburban office building in the neighborhood of Alexandria West. The development currently projects 117-119 apartment units, and its existing floor plates are architecturally acceptable for multifamily requirements with hallway corridors that features units on each side. This project lies within an opportunity zone, defined by the IRS as “an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” In this instance, the investors will receive tax benefits over the hold period.

Bridging the Affordability Gap

As illustrated in the multifamily project in Alexandria, Virginia, the benefits from the qualified opportunity zone could make an office-to-residential conversion more attractive to investors. Similarly, the City of Houston recently enacted The Downtown Living Initiative to incentivize residential development in its downtown area. This program offers up $15,000 per unit in tax rebates to developers. The 2023 State of the Nation’s Housing report from the Joint Center for Housing Studies of Harvard University noted, “Programs and policies at the federal, state, and local levels are making incremental progress toward addressing these various challenges, but more resources are needed.”

The federal government recently announced billions of dollars in federal funding to spur the conversion of office buildings to multifamily housing. From federal loans, grants and tax credits to technical assistance programs and zoning changes, these initiatives are inherently drawing development to strategic areas.

From a local perspective, there may be opportunities for governments to help as well. First and foremost, local governments control the zoning in their communities. In low-density suburban areas, assistance may be as simple as changing the zoning of a project from commercial to residential, or even implementing a neighborhood specific form-based code consistent with the existing office building to spur nearby retail development. In other situations, increasing the density allowances for a project could be beneficial, especially for mid-rise suburban buildings that structurally could have more floors built on top of the existing building.

As many cities see residents continue to move further and further away to new construction in order to attain housing affordability, it is clear that the real estate and economic impacts could be great if developers take a gamble with suburban conversions.

Weaver can help as you navigate the financial implications of a new development or conversion project. Contact our real estate team today.

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