NAIOP – Office Conversions to Multi-family
We live in a post-pandemic world where office vacancies continue to rise while affordable housing inventory feels non-existent. Office-to-residential conversions serve as a potential solution to fill vacant office buildings while simultaneously creating more affordable housing options. Earlier this month, Dr. Malizia from UNC-Chapel Hill joined NAIOP Raleigh-Durham and presented Yardi Matrix data on office-to-residential conversions. Here’s a recap of his presentation.
Office Market Overview:
The US office market has not recovered from COVID. Employment growth was used as the indicator of office demand but due to remote work, it is no longer correlated with the absorption of office space. According to CoStar, in Q2 2023 the US Office Market was sitting at ~13.1% vacancy rate with negative net absorption of negative 13,442,931.
With Raleigh-Durham being in the Southeast US, we’ve been somewhat insulated from the rest of the country. Our office market is still feeling the heat. According to CoStar, there is approximately 77,000,000 SF of office space in the Raleigh-Durham market. There is approximately 7,800,000 SF of vacant office space in the Raleigh market (~10% vacancy). The 12-month net absorption is negative 775,000 SF. According to the Savills Raleigh-Durham Sublease report, there is an additional 4,260,000 SF of office space available for sublease.
Factors Influencing the Office Market:
We’ve seen some CEOs call their employees back to the office, but the reality is many companies have not finalized their future for office space. There is a lot of macroeconomic uncertainty (inflation trend, fed rate hikes, recession, etc.) which has caused a delay in corporate decision-making.
Office to Multi-family Conversions:
Dr. Maliza presented great information that I’m reciting here:
– From 2020-2022 there were 80 office buildings converted to multi-family throughout the US.
– The 80 conversations created 14,263 multi-family units.
– Data on projects under construction or seeking entitlements indicate that office-to-residential conversions will increase over the next several years.
– Many distressed office buildings will become available at discounted prices, but very few will be financially feasible to convert.
– The most important feature of a low-rise office is the building width of 65-70 feet.
– The most important features of high-rise offices are having central cores and small floor plates.
– Some additional features that play a significant role in identifying conversion
opportunities:
- Convenient parking
- Access to public transit
- Proximity to urban amenities
- Natural light penetration
- Public safety
