A shift in U.S. commercial real estate is underway and the signs point to a seismic transformation. With office buildings facing mounting distress from debt and the remote work revolution, many experts are predicting that vast amounts of office space may soon be converted into housing. Real estate analysts say the looming supply could reach one billion square feet.
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Richard Barkham, chief global economist at CBRE, suggests that the fallout from underperforming Class B office buildings – aging, less attractive properties – could be immense. “These buildings have high vacancy rates, some even reaching 80%,” Barkham told Business Insider. “Over the next decade, many could either be demolished or transformed into residential spaces.”
As office buildings stand largely empty, a surge of so-called "fire sales" seems inevitable. Banks are already beginning to offload these distressed properties from their balance sheets.
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According to the Federal Reserve, the total value of commercial real estate loans held by banks fell to $2.9 trillion in 2024, a decrease from a high of $3 trillion earlier in the year. Large banks, wary of the uncertain outlook, are tightening lending standards for nonresidential real estate, with 74% reporting stricter policies.
The wave of office-to-apartment conversions is already gaining steam. In 2024 alone, 55,000 office spaces were planned to be converted into apartments – a 357% jump from 2021, according to data from Yardi Matrix, as reported by RentCafe.
Such conversions could provide much-needed housing amid the U.S. housing shortage and some experts see this as a creative solution to both the housing crisis and the declining demand for office space.
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John Vavas, a Polsinelli real estate attorney, has witnessed the growing trend firsthand. Before the pandemic, office-to-residential conversions were rare. But this year, he's worked on several such deals. “With so much office space sitting vacant, this seems like the logical next step,” Vavas told Business Insider.
CBRE's analysis estimates that over 70 million square feet of office space could be converted into residential units. But it won't be easy or cheap. In cities like New York, developers face the challenge of converting towering office buildings. Silverstein Properties, one of the city's largest landlords, is pouring $1.5 billion into transforming some of its office assets.
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There's little doubt that U.S. office space needs have shrunk since the pandemic normalized remote work. According to data from CommercialEdge, the U.S. office vacancy rate stood at 19.4% in August 2024, a 2% rise over the previous year.
Some cities are feeling the pinch more than others. Yardi Matrix data shows that New York City, Washington D.C., Chicago, Los Angeles and Dallas have seen the largest increases in office-to-apartment conversions this year.
Despite the logistical hurdles and costs, many see the office-to-residential trend as the best way to repurpose failing office buildings. “We're seeing landlords with underperforming properties,” Barkham said. “For many of them, converting these buildings makes sense.”
The shift won't happen overnight, but as more office buildings become vacant, experts believe that cities will begin to adapt. Barkham is optimistic: “The ripple effects could be profound – shorter commutes, new shops, restaurants, even theaters in former business districts.”
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