The frontier of building conversions from nonresidential to residential use continues to expand.
Downsizing of office spaces during and after the pandemic, the ongoing decline of non-high-end shopping malls, the continued rusting out of former factory and warehouse spaces and the need for more affordable housing in bustling urban and suburban areas have combined to create opportunities for developers who want to undertake adaptive reuse projects.
In 2023, former nonresidential buildings were converted into apartments at a rapid pace, with more than 12,700 created, up 17.6% from 2022, according to rentcafe.com. Of these, 36% were in former hotels, 28% in offices and 15% in factories. New York City accounted for nearly 6% of all converted apartments nationwide in 2023 with 733—all of them in former hotels—followed by Richmond, Va., with 662.
By the end of 2024, another 55,000 conversions were expected, with offices at 38%, followed by hotels at 24% and “other” buildings like schools and shopping malls at 20%. Washington, D.C., has had the most office-to-apartment projects, followed by New York, Dallas, Chicago and Los Angeles.
The International Association of Plumbing and Mechanical Officials (IAPMO), in a white paper titled, “Adaptive Reuse: Converting Offices to Multi-Residential Family,” notes that the U.S. has 3.8 million fewer houses than it needs, according to Freddie Mac, while a combination of underbuilding since the mortgage crisis of the late 2000s and higher interest rates also are “contributing to the supply crunch.” Nearly half (46%) of renters are paying more than 30% of their income on rent, while nearly one-quarter (24%) are paying more than 50%, IAPMO notes.
But office space alone could never meet the needs of the housing crunch, says Christoph Lohr, Vice President of Technical Services and Research for IAPMO. “There’s no such thing as a silver bullet,” he says. “It’s going to take a portfolio of solutions.” Lohr says office conversions can be part of the solution to at least start chipping away at affordability issues. “It’s going to cost you a lot less than ground-up,” at least for the right building, he says.
Older office buildings are more likely to work both because they tend to be more elongated—with less windowless space in the middle—and their windows are more likely to be openable. “If you’re having to add ventilation with fans bringing in fresh air from the outside, that costs more money,” Lohr adds.
Local governments need to be willing to rezone properties for conversions to work, and in some cases, state tax abatements are necessary to make the financials work out, Lohr says. “You’ve got to make the numbers work, in the real world,” he says. “And then the buildings themselves, some of them are complex in terms of systems. Flexible mechanical and plumbing codes are important…. You want to have flexibility so you improve the feasibility of the project.”
Especially in a high-rise project, the nature of existing plumbing systems is a key variable, Lohr says. “Having to add bathrooms and kitchens and laundry spaces into different apartments, and the water coming in and sewer going out, and the size of that can lend itself to potential costs. Especially if you’re having to rip up everything going toward the street,” he says.
Cincinnati-based Village Green Apartments has worked with developers on several adaptive reuse projects in the Midwest and South, according to Melissa Joy, Senior Vice President, who notes that such projects tend to move forward more quickly but vary in terms of expense, vis-à-vis ground-up developments.
Among these projects has been a conversion of two commercial office buildings in Cincinnati to apartments, with very large floor plans because the footprints lent themselves, to which townhomes were added in the courtyard area; pent-up demand led to very rapid lease-up of the 228 units with an average footprint of 1,333 square feet, Joy says. Another example was a conversion of three buildings in St. Louis that had been a historic hotel, with as many as 40 different floor plans among its 300-plus units. “When you take a historical building, you have to get very creative to maximize the space,” she says.
A third redevelopment in which Village Green was involved, in downtown Cincinnati, is called The Mercantile Apartments because it’s in a historic building that continues to house the still-operating Mercantile Library; the space converted into 172 units that average 790 square feet most recently had been offices, Joy says.
“That’s another one with unique floor plans. It’s a prominent building—everyone knows where it is, it’s a staple of the downtown area,” she says. “When a building is built for something other than residential, there’s often not a parking plan associated with it. In an urban environment, that’s the first challenge to solve. We’ve been able to procure several parking options, including many spaces in the building and in the immediate vicinity of the building. The building is currently leasing and has its very first residents.”
To ensure the success of adaptive reuse projects, a management company like Village Green starts by partnering with an operator that’s well-versed in its sub-market, Joy says. “Knowing the market is critical,” she says. “Have a partner that you can digest data with, and slice it up in a way to make sure you’re getting the story.... That’s the demographic that can afford the rent. That’s why these people with this income would want to live there. And also being realistic for the timeline in absorbing units.”
Adaptive reuse projects often run into unpredictable problems, Joy notes. “i’ve heard of projects finding things they had to abate, finding walls they weren’t expecting to move that did have to be moved,” she says. “You pre-lease units, and you want to get people excited about living there, but you have to manage expectations. It’s critical to have ongoing communication between the people doing the building and the people renting the apartments.”
BET Investments, based outside of Philadelphia in Dresher, Pa., focuses on mixed-use developments that include a blend of apartments, retail and offices, in 11 mostly Eastern states, says Michael Markman, President. “We feel they have great synergies,” he says.
Among the company’s conversions have been the Granite Run Mall in Media, Pa., known as the Promenade at Granite Run, in which BET tore down a significant chunk of existing retail space and built 192 residential units and 843,000 square feet of retail; another 208 units are under construction. In Horsham, Pa., the company bought a 100,000-square-foot office building, tore it down and built 256 apartments on the 10-acre site. In Blue Bell, Pa., BET will convert a 130,000-square-foot office building with parking underneath to 100 apartment units and add another 80 units on an existing parking lot.
BET Investments has undertaken projects that involve at least partial teardowns, Markman says, adding that probably only about 20% to 30% of office buildings make sense for conversion. “The conversions are so expensive,” he says. “They can be profitable, but they’re not highly profitable. Older office buildings, between the systems and electrical, and dividing the space up, they’re a lot of work. The ceiling heights are never where you want them to be....You have to find the right location where the rents are going to be high enough to justify the cost.”
Another challenge with conversions tends to be zoning, which often doesn’t match what the developer has in mind, so they need to work with the municipality and make concessions such as off-site improvements, Markman says, although those concessions have been somewhat abated in recent years. “People are going back to work, but not in the way they were pre-COVID,” he says. “Tax bases are shrinking, and communities realize they have to figure out other uses for these pieces of land. There’s a higher receptivity lately.”
For example, BET Investments recently bought a property called Conshohocken Ridge in Conshohocken, Pa., at a substantial discount. It’s an eight-office-building property with a high vacancy rate, and the company plans to tear down three of those buildings and put up 20,000 square feet of retail and 200 apartments, Markman says.
“We will end up having well-leased office space, retail with a high-end grocer and apartments above it. It makes for kind of an interesting symmetry,” he says. “Office buildings will start to fill up more because they realize they can walk to retail. Apartments always do better when you have a grocery store. The three uses benefit from each other.”
BET Investments always looks for highly visible locations on busy roads in putting together these mixed-use conversion deals, same as a shopping center might, Markman says. “We pick locations for apartments, even if they’re not mixed-use, that would otherwise be good for retail,” he says.
In some cases, department stores or other large users might want to stay, and you need to build around and work with them, Markman says. “You have to have lots of conversations,” he says. “There’s less flexibility than with a greenfield, but it gives you well-located dirt.... We’d probably do it again for the right mall location. They generally have restrictions on the property, and you have to work with them to release the restrictions, with reciprocal easement agreements. If you can’t find mutual benefits, it won’t work.”
Kimco Realty, headquartered in Jericho, N.Y., with over 550 properties across the country, has been building new multifamily developments on its existing retail properties where the company has excess parking and can create appropriate density given community zoning, says Geoffrey Glazer, Senior Vice President of National Development. “There’s a tremendous synergy between multifamily use and retail use,” he says.
At the Pentagon Centre development in Arlington, Va., Kimco tore down 6,500 square feet of existing retail space (329,000 remains) and modified and moved some of the parking structure. The company then built two new residential towers—one called The Witmer, with 440 units, and the other dubbed The Milton, with 253 units—both of which have retail on the first floor.
“You come home, you get to walk out and go to the grocery store, walk out to get other soft goods,” Glazer says. “You have the entertainment of movies...and other things we add to our centers....It plays off well for retailers who have a core group of residents who love to eat at the restaurants, go shopping at the grocery store or drug store; they’re very complementary to one another.”
Adaptive reuse conversions more typically occur in Class B office buildings, most often in major cities like New York or Washington, D.C., Glazer says. “People have done retrofits and turned them into hotels or multifamily,” he says. “Retail-wise, with big boxes or malls, if you have a vacant [department store], it’s very challenging to convert that into multifamily. You’re putting a new structure in and getting more height so you can have a layout that actually works.”
Retrofitting office buildings is not easy either, Glazer says. “The footprints of those floorplates are not very suitable for multifamily,” he says. “With a big footprint of 25,000 square feet, it’s easy to do the perimeter. But the interior units, unless you carve away and let natural light come through in the middle of the building, it gets very challenging. The columns are in the wrong location; the utilities might not be in the right spot.”
On the plus side, reusing existing buildings might gain quicker sign-offs from the municipality and local community, especially in the context of historical facades, Glazer says. “People don’t like to see abandoned buildings in their communities,” he says. “If you’re able to reuse, it might turn around [approvals] quicker than ground up.”
Lohr says the U.S. will continue to see an increase in adaptive reuse as the population grows and as office space leases signed before the pandemic continue to expire in the next few years. “Certainly, some companies are going back, but even the office environment itself is shifting from individual offices to more collaborative spaces, and were doing so before the pandemic,” he says. “So, there’s likely going to be more office space available in the near future.”
Adaptive reuse also drives sustainability, given that the most sustainable building is one that’s already been built, Lohr notes. “Many Americans enjoy walkable cities,” he says. “Converting offices in a large metropolitan area to residential or mixed-use helps promote more of a many-things-in-one-area walkability that brings people together.”
Ed Finkel is a freelance writer for units.