Office-to-residential conversions are becoming increasingly common in densely populated cities across America. Developers and the cities they operate in are finding these conversions to be a practical solution to two pressing issues: the surplus of office space and the shortage of housing. However, numerous physical and economic constraints must be overcome to successfully execute such projects.
One crucial aspect that needs to be addressed for an office property to be a suitable candidate for conversion is its physical attributes. Factors such as column spacing, office configurations, existing floor plans, the presence of operational windows, and shared bathroom facilities must all be considered. Compared to postwar properties, early 20th-century buildings are generally more amenable to conversion, as certain floor plans and building shapes lend themselves well to residential apartments. It’s worth noting that older buildings often feature operational windows, which were designed to provide natural ventilation and sunlight in an era predating widespread air conditioning.
The economics of conversion is generally more favorable for prewar buildings. Older office spaces have lost popularity among tenants, resulting in a decreased value. In some areas, the rental income potential of residential units may now surpass that of offices. Additionally, the conversion process is typically faster compared to ground-up construction. However, regardless of the age of a building, the alteration of mechanical systems poses the biggest challenges. Plumbing is typically the most difficult mechanical alteration as water supply and sewer lines need to be run to each individual apartment.
Postwar buildings present unique challenges of their own. The emergence of air conditioning and modern lighting technologies allowed developers to build larger floor plates. For instance, financial institutions built expansive trading floors, and large corporate offices feature extensive rows of cubicles. Moreover, modern office buildings often lack operable windows, and their floor plans may include an excess of elevators, which are unnecessary for residential properties. In addition, the longer distance from exterior walls to interior corridors vs. pre-war buildings makes for challenging layouts.
Some interesting metrics developers need to consider include the fact that office property prices in New York City currently exceed multifamily properties by a margin of 87% on a square foot basis. In addition, office tenants usually pay additional rent for common areas whereas only 80 to 85 percent of all square footage in a residential building is considered rentable. So, significant downward price adjustments will need to occur for office properties. In addition, the rentable square footage calculation will need to be addressed for a property that is a candidate for conversion. Irrespective of the physical and economic challenges, conversions will be an area that will likely come into greater focus over time as economic incentives and the easing of regulatory constraints serve as a catalyst for this activity.
