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Why the office exodus hasn't translated into a bigger spike in office-to-multifamily conversions, as told by Goldman Sachs

Goldman Sachs analysts just published a report titled “The price is still too high for office-to-multifamily conversion."

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Underutilized office buildings, due to the surge of remote work, have increased the U.S. office vacancy rate to 13.5%, the highest level since 2000. Over the next decade, Goldman Sachs analysts expect the office vacancy rate to rise to 18%.

According to Goldman Sachs, about 4% of U.S. office buildings may no longer be viable. In the cities most affected by remote work, between 14% and 16% of offices may no longer be viable. These are typically office buildings located in suburban areas or central business districts which were built more than 30 years ago, have not been renovated since 2000, and currently have vacancy rates exceeding 30%.

However, only 0.49% of office inventory was converted into multifamily units in 2023, compared to 0.23% in pre-pandemic 2019. Goldman Sachs expects that figure to rise to just 0.74% by 2028.

That’s according to a report published this week by Goldman Sachs titled “The Price Is Still Too High for Office-to-Multifamily Conversion,” which concludes that the high costs of converting office buildings to multifamily housing units are hindering a more significant acceleration.

“The office-to-multifamily conversion rate is [still] quite low, suggesting that there may be substantial financial and physical hurdles to conversion,” wrote Goldman Sachs analysts Vinay Viswanathan and Elsie Peng in the report. 

According to analysts at Goldman Sachs, office prices still haven’t fallen enough to entice developers to do more conversions.

Goldman Sachs analysts found that: “For the top 5 metropolitan areas that are most affected by remote work, we estimate that office acquisition prices would need to fall almost 50% for conversion to be financially feasible. This suggests that most of these offices will likely remain underutilized in the near term.”

In part, office prices haven’t fallen further because institutional barriers to reevaluating office space have resulted in many lenders extending or modifying office mortgages that might otherwise default. As a result, forced property sales that would have otherwise already happened have not occurred.

The report states that another obstacle to conversion is safety codes. Residential building codes require bedrooms to have certain sizes of windows, but it is impossible to restructure some office buildings with deep floor plates—common in large buildings—in a way that provides all units with proper windows, Goldman Sachs analysts explain. Additionally, transforming an office’s existing plumbing, ventilation, and electric system for each residential unit can be challenging.

“The annual conversion rate from office to multifamily will remain low and only increase slowly to 0.74% in the next four years, delivering about 20,000 additional multifamily units per year,” wrote Goldman Sachs. That's a drop in the bucket compared to the total of 468,000 multifamily units that were built in 2023.

Big picture: Office-to-resi conversions are on the rise; however, economic and financial barriers mean that it still remains a small segment of the residential housing market.

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