As the popularity of hybrid work increases, office vacancies are becoming a major concern for building owners, cities and workers.
While some companies are encouraging employees to return to the office full time, they tend to seek more modern spaces in popular locations to lure their employees back. Older offices with fewer amenities or bad locations have become undesirable. And thanks to many companies embracing remote work or downsizing in office operations, decades-old office towers sit partially empty.
Where does this leave these older office spaces? Property purgatory. These offices are considered too old to attract cutting-edge companies, but not old enough to be torn down or entirely converted.
If this trend continues, office space owners will struggle to pay bills and find consistent tenants. Lower tenant demand due to hybrid work may cut $453 billion off the value of offices across the U.S. And the ripple effect extends far into local economies. Empty offices lead to less daytime foot traffic, hurting restaurants and other street-level businesses. Declining building values also lead to less property tax revenue for cities, which can end up hurting various departments and programs. Cities with an influx of hybrid workers will struggle to provide enough housing. And workers will likely suffer rent increases as demand for housing increases and supply decreases.
In an effort to address these concerns, some cities have begun exploring the idea of converting dated and less desirable office spaces into residential living options. Rather than bringing in businesses, landlords can lease to individuals and families. Calgary has developed an incentive program for office-to-residential conversion projects. City officials feel this program will help to bring new life and balance into the largely empty city center.
There’s a historical precedent for office-to-residential conversions in the U.S. as well. After the attacks on September 11, 2001 and the global financial crisis of 2008, many offices in lower Manhattan were converted into luxury apartments and condos. Many of these buildings — built in the late 19th and early 20th centuries — had smaller floor plans and improved lighting, which made the residential conversion manageable. Developers in the past also benefited from a variety of incentives and zoning changes that encouraged the construction and renovation of office space into new apartments. But today, there are no building incentives for residential use renovations or zoning modifications to facilitate this transition.
If developers and local governments can work together to convert unused offices to more profitable residential spaces, that could be a promising opportunity for real estate investors. Real estate investors focused on transforming currently abandoned office space into residential units could see strong returns and help their communities become more sustainable. While these opportunities are likely few and far between right now, investors can still keep an eye out for new policies and zoning legislation that will make these property conversions possible.