Office Space Hits Highest Vacancy Rate Since 1979 — Here's Why Converting it To Residential Space Isn't The Answer

The average vacancy rate for America's office property is nearly 20%, which matches the highest vacancy rate since 1979, according to Moody's Analytics. It's more bad news for a sector that was already reeling from a difficult 2023. 

Many people wonder why developers don't kill two birds — office space vacancy and homelessness — with one stone by converting their empty office spaces into residential units. Benzinga explains why that's not a practical solution.

The Locations Of The Hardest-Hit Office Markets Don't Match The Cities Hardest Hit By The Homelessness Crisis

Location is everything in real estate, and according to Moody's the major cities being hit hardest in terms of occupancy rates are Houston, Austin and Dallas, Texas. Those cities have problems with homelessness, but the epicenter of America's homelessness crisis is coastal cities like New York, Los Angeles and San Francisco. In the case of the latter three cities, a lack of affordable housing is the main driver of the homelessness problem.

Houston, Austin and Dallas, along with their metropolitan areas, are experiencing major population growth because of an abundance of land and affordable housing in the state. The average home prices in San Antonio, Houston and Dallas are significantly lower than the national average, and developers have more than enough real estate coming online to suit the needs of the new population.

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The Cost Of Configuration Is A Massive Challenge

The office vacancy crisis may be most acutely felt in Texas, but Los Angeles, New York and San Francisco are certainly struggling with the same issue. Cost and configuration are significant challenges to converting vacant office space to housing. The theories of architectural and floor plan designs are almost opposed when comparing multifamily apartment housing to office space. Most of the best office space conversions are lofts.

Loft space is wonderful for young, hip, high-wage earners and dual-income, no-kid (DINK) couples, but it's not necessarily suitable for families who need living space. The cost of gutting entire floors of office buildings and reconfiguring them to multifamily dwellings — one-, two- and three-bedroom apartments — is prohibitive, especially once you factor in the plumbing and electrical work that adding full kitchens and bathrooms with tubs requires.

Zoning And Convenience Is Another Issue

Successful residential communities require more than just places to live. They can't serve the needs of their residents if schools, parks, stores and other services are not nearby. However, the epicenter of the vacant office problem is concentrated in most cities' downtown areas. After years of growth concentrated in the suburbs, most of America's downtown cores lack the schools and parks that complete residential neighborhoods.

Zoning is another issue. Some downtown cores have mixed zoning that allows for residential and offices to be placed side by side, but many don't. While cities can rezone certain areas, the public infrastructure of schools and parks would still have to be paid for. More importantly, the land to build them would have to be available, and most downtown areas don't have the land available for schools and parks.

Converting Office Space To Residential Doesn't Solve The Affordability Issue

The kind of heavyweight builders and developers who have the funds or access to the funds necessary to convert large office buildings to residential spaces are not altruists. This is not an effort they would undertake out of the goodness of their hearts. It's just the opposite. Every one of them would expect to make a profit or they wouldn't get involved in the project.

The only realistic way to reposition the office buildings would be to convert almost all the space into luxury dwellings. The builders couldn't recoup their investments and pay off shareholders any other way. As it stands, the only building underway is u the luxury sector, so converting America's vacant office space to residential units would not result in creating the affordable housing that is in such short supply.

Easy Solutions Are In Short Supply

It would be the best of all worlds if the solution to America's office vacancy and homelessness crisis was a magic bullet like converting office space to residential units. But easy solutions to these issues are in short supply. The only thing beyond doubt is that it will take a coordinated, sustained effort from the public and private sectors to solve America's office vacancy and homelessness crisis.

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