It is almost impossible to have a discussion about vacant office buildings without someone suggesting to turn that vacant office space into multifamily units. On the surface that sounds great, given that the U.S. is 5.5 million homes short of what’s needed, per NAR Research. But it isn’t as simple as that. For office space to be successfully converted to multifamily, many things would have to line up.

Multifamily Rents Would Need to Exceed Office Rents

This is generally the first hurdle many office buildings face for a multifamily conversion to work. In most markets, office rents are higher than multifamily rents. You would need to find markets that have the opposite, or at least a market where average multifamily rents are higher than an office building.

Construction and Infrastructure Present Many Challenges

Recently, construction has been more difficult due to wide pricing swings and the availability of construction materials and mechanical systems. In 2021, lumbear parices increased dramatically, with the cost changing almost daily. Price increases aren’t the only problem. Even now there can be delays of more than a year to get some mechanical systems for commercial properties. A major conversion under this amount of uncertainty is difficult. If the cost can be overcome, timing can still be an issue. As the old adage goes, time kills deals.

The other thing to keep in mind is tzhat many locations with office buildings were developed specifically for office space, so establishing things like sewer capacity, availability of water, or parking for multifamily becomes more difficult and expensive to complete. These changes may be as simple as upgrading the individual building but sometimes require new infrastructure being brought into the area. This increases the project cost exponentially, if it’s even possible.

Zoning and Code Changes are Difficult to Manage

The next thing that adds a layer of complexity is working with the municipal zoning and development codes. Each municipality has different rules. Rezoning from office use to multifamily use may not be possible without rewriting the zoning codes. Also, the development and construction codes are different for office and multifamily buildings. Many municipalities do not have the codes in place or the ability to provide the needed variances to make a conversion such as this happen. If they don’t, there is always a possibility to change them, but this adds time to the project.

What About Properties That Aren’t Completely Vacant?

An additional concern comes into play if there are still a few tenants in the building. Accommodating those tenants can work if the plan for the conversion is a mixed-use building. In that case, you need to work through the relocation of the tenants, which also increases the cost of the project. Alternatively, you would need to wait for leases to expire or buy out the leases from the existing tenants. Each of these options adds to the total cost of the project.

Do You Have the Time?

Completing a conversion from office to multifamily could take 12 to 18 months at best. Realistically, it might stretch on for three years or longer. It’s a huge decision for an investor to pull the plug on a property with cash flow to convert it to a different use. The longer it takes, the more expensive the opportunity cost becomes. Conversions do happen, but quickly changing market conditions and the challenges presented by these other factors make this type of project difficult.

Conversions do happen, but quickly changing market conditions and the challenges presented by other factors make this type of project difficult.

Because of the complications to repurpose office buildings to multifamily and the need for more housing, REALTORS® have asked congressional leadership in Washington D.C., to support HR 5041, The Greater Revitalization of Shopping Centers Act, which will create a grant in the Section 108 Loan Guarantee Program to help repurpose shopping centers. REALTORS® also expressed support for HR 4759, The Revitalizing Downtowns Act, which creates a Qualified Office Conversion Tax Credit to convert unused office buildings into residential, commercial, and mixed-use properties.