In the wake of the pandemic, the real estate market is undergoing a seismic shift. With many downtown areas experiencing a significant decline in daytime activity due to work-from-home policies, cities across the United States are exploring innovative solutions to revitalize underutilized office spaces. One such solution is the conversion of office buildings into residential units, a trend that has gained substantial momentum. According to a recent Urban Institute analysis, five cities stand out as prime candidates for these adaptive reuse projects: the San Francisco Bay Area, Seattle, Phoenix, Atlanta, and Denver. For investors, these cities represent a golden opportunity to capitalize on a burgeoning market.

The Urban Institute’s Findings

The Urban Institute’s report, published on June 5, highlights the dual benefits these cities could reap from office-to-residential conversions: addressing the distress in their office real estate markets and meeting the pressing need for increased housing supply. Jorge González-Hermoso, a research associate at the Urban Institute, emphasizes the potential gains for cities that embrace adaptive reuse. “Cities experiencing both acute distress in their office real estate market and a significant need to increase their housing supply have the most to gain from intensifying their efforts to enable and ease office-to-residential conversions,” González-Hermoso writes.

The report suggests that these cities encourage adaptive reuse by allowing more flexible land use, updating building codes, streamlining the permitting process, and offering tax credits or property tax abatements. Such measures could significantly lower the barriers to conversion projects, making them more attractive to investors.

City-Specific Insights

San Francisco Bay Area: Despite having a relatively stable housing supply, San Francisco’s office market is infamously distressed. The city’s high office vacancy rates and falling office rents make it a prime candidate for conversions. For investors, San Francisco presents an opportunity to tap into a market with a high demand for residential units amidst an oversupply of office space.

Seattle: Known for its booming tech industry, Seattle is facing both high office vacancy rates and a significant need for more housing. The city’s flexible zoning laws and supportive local government make it an attractive location for adaptive reuse projects.

Phoenix: With its rapidly growing population and relatively affordable real estate, Phoenix offers a promising landscape for investors. The city’s need for increased housing supply, coupled with its distressed office market, creates a fertile ground for office-to-residential conversions.

Atlanta: Atlanta’s burgeoning population and thriving business environment have led to a high demand for housing. The city’s office market, however, has been slow to recover from the pandemic, making it an ideal candidate for conversion projects.

Denver: Denver’s strong economic growth and influx of new residents have put pressure on the housing market. At the same time, the city’s office sector is struggling with high vacancy rates, presenting a unique opportunity for adaptive reuse.

The Bigger Picture

The concept of turning offices into housing gained traction as cities nationwide faced significant declines in downtown activity during the pandemic. This shift prompted a surge in adaptive reuse projects, with the White House backing the movement last year through financing and technical assistance. According to a March 2024 analysis by RentCafe, the office-to-apartment conversion pipeline has more than quadrupled between 2021 and 2024. The trend is particularly prominent in Washington, D.C., New York City, and Dallas.

However, the Urban Institute’s analysis takes a broader view, considering metrics such as office vacancy rates, changes in office asking rents, housing vacancy rates, and the rate of change in gross median rents over the last decade. Although New York City was excluded from the analysis due to incompatible office market and housing data, the report’s findings highlight cities with both high office distress and significant housing supply needs.

Legislative Support and Future Prospects

Several cities and states are already taking proactive steps to facilitate office-to-residential conversions. In California, new laws expedite the review of adaptive reuse project plans and allow housing development in commercial areas under certain conditions. These legislative efforts aim to streamline the conversion process and encourage more projects.

González-Hermoso cautions that while office conversions are not a panacea for the housing crisis, they offer a viable strategy for incremental and meaningful change. “Office conversions will not be the sole answer to our housing crisis, nor will any other policy in isolation,” he writes. “But conversions offer an effective strategy for discrete and incremental changes in our cities.”