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Glut of Office Space? Kick-Start the Office Conversion Process

December 3, 2021 John Walker


Office Market Trends At-a-Glance

Well into the pandemic many organizations find that they function quite well based on a virtual or hybrid office model.  Meanwhile, workers are happy to skip the daily commute, enjoy the companionship of their pets and have become accustomed to the flexibility that comes with working from home.  Even when there is a return to normalcy, demand for office space (certainly on a per-worker basis) is facing re-assessment.

These changes are reflected in a recent Moodys Analytics report.  This study cites Class-A office vacancies on a national level climbing from 13% in early 2020 to over 17% in the summer of 2021.  Speculation is for these rates to surpass 20% by 2022.  What’s more, rents dropped by more than 10% over the same time frame.

This glutted market for office space is now tipping the scales of financial feasibility for many properties towards conversion to different, more in demand uses – especially with older Class-B and C stock.

Actions Economic Developers are Taking

Some EDOs and other organizations, eager to kick-start this process, are proactively initiating impact analysis of candidate structures.  They are looking into best alternative uses for a given property, quantifying potential demand and evaluating financial feasibility of a possible conversion.

Considering Housing

Most communities find themselves in a tight housing market and, in many cases, multi-family residential space is proving to be the most viable for converted office space.  A thorough demographic analysis quantifies underlying demand based on rates of household formation and net in-migration.  Along with a profiling of income distribution and growth, a clear picture of most likely or needy residents emerges.  Would the conversion best serve low-income families or is there a stronger need for retirement facilities?  Financially, luxury condominiums may be the most viable.

In many cases, review of demand suggests that, rather than residential, an alternative commercial use is most appropriate.  The rapid expansion of e-commerce and efforts to shorten delivery times has boosted the need for localized warehouse and distribution facilities.  Meanwhile, some former office space has been successfully renovated for light manufacturing or use as biological and chemistry labs.   Best use cases are revealed with analysis of local economic data along with review of access to markets and transportation infrastructure.

Closing the Funding ‘Gap’

Identifying new uses for older office stock is, of course, only part of the story.  Financial feasibility and funding sources also play into the process of identifying which option shows the most potential.  In some use scenarios, sufficient ROI or other financial metrics are not met without the benefit of incentives.

And providing those incentives is precisely the goal of the Revitalizing Downtowns Act currently in deliberation by the U.S. Congress.  Under this program, developers would receive a 20% reimbursement of their expenses after converting obsolete office buildings that are at least 25 years old into residential, commercial or mixed-use properties.  For projects including residential re-development, 20% of the units would need to be affordable housing to qualify for the reimbursement.

Assessing the Regulatory Environment

Further considerations are also under review.  Do current, and possibly outdated, zoning requirement restrict a conversion that the community would otherwise find desirable?  Are there elements of the local approvals process that could be streamlined?  Knowledge of these stumbling blocks allows a community time to address them ahead of time, smoothing the path for redevelopment.

Preparing Community Assets + Infrastructure

More broadly, transforming office space to new uses brings both community benefits and concerns.  An increase in residency spurs added demand for retail and alters traffic patterns.  It enhances property tax revenues but also increases the need for municipal services.  How easily are the local schools able to absorb an increase in children coming to the community?

For commercial conversions, are the current roads and bridges sufficient?  Infrastructure improvements may also need evaluation.  Implications for municipal finances are also up for consideration.

These feasibility studies, proactively initiated, provide the foundation for redevelopment of local assets.  Furthermore, they signal to developers a readiness to support conversions as part of a larger community vision.