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70 million square feet of U.S. office space is being converted, CBRE says
According to a report by CBRE, nearly 70 million square feet of U.S. office space, accounting for 1.7% of the total supply, is currently undergoing conversion.
Meghan Malas
April 24, 2024
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On Tuesday, Texas-based developer Hines announced the start of the redevelopment process of a 59-year-old, 25-story, 217,000-square-foot office tower in Salt Lake City. The project will convert the skyscraper, known as University Club Tower, into luxury apartments by 2025, complete with amenities like a pool, pet spa, gym, clubroom, and rooftop deck.
With hybrid and remote work sticking around, and office vacancy rates rising, more investors and developers are gradually shifting towards office conversion projects like the one in Salt Lake City.
According to a new report this month by CBRE Group, nearly 70 million square feet of U.S. office space, accounting for 1.7% of the total supply, is currently undergoing conversion to other uses as of Q1 2024. This marks an increase from 60 million square feet, or 1.4% of total supply, in Q3 2023.
CBRE's report provided insights into the types of conversions developers are undertaking. It's not just apartments.
Office-to-multifamily is by far the most common, making up 63% of conversions, the CBRE report finds. In total, there’s 31,000 converted apartments in the pipeline.
Cost barriers give investors pause on office conversions projects.
“Conversion costs generally range between $250 and $650 per square foot, depending on the complexity of the project,” CBRE analysts wrote in the report. “High interest rates are an additional challenge, although CBRE expects rates will begin to fall later this year.”
In addition to property costs, safety codes may also be obstacles to apartment conversion. A Goldman Sachs report in February noted that residential building codes require bedrooms to have certain sizes of windows, but it is impossible to restructure some office buildings with deep floor plates, which are common in large buildings, in a way that provides all units with proper windows.
The existing side of the U.S. housing market remains constrained, which is understandable given the spike in mortgage rates that has dampened both national housing demand and housing supply. Switching costs remain high at the moment, and many homeowners are uninterested in giving up their sub-4% mortgage rate in return for a 7% rate.
Look no further than the Mortgage Purchase Application Index, a leading indicator for existing home sales, to understand the situation. The reading published on Wednesday still hovers around the lowest levels of the post-2000 era.
Click here to view an interactive version of the chart below
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