The rise of remote and hybrid work has triggered a shift in commercial real estate, particularly in the office sector. As companies shrink their office footprints, urban centers are left with an overabundance of empty or underused office spaces. In response, developers and cities are exploring ways to revitalize these spaces, with one emerging solution being office-to-residential conversions. However, traditional apartment conversions often prove costly and complicated, which has led to a growing interest in an alternative: dorm-style co-living spaces.
A Cost-Effective Conversion
Office buildings, typically designed for efficiency and flexibility in business settings, are rarely well-suited for residential use. High costs and structural barriers, like window placement and plumbing configurations, can make traditional apartment conversions unfeasible. A recent report by Pew Charitable Trusts and Gensler suggests that converting offices into co-living spaces may be a cheaper and more practical solution. Co-living emphasizes compact private units (often called micro-apartments) with shared kitchens, bathrooms, and living spaces.
This strategy can cut conversion costs by approximately 25% to 35% compared to traditional apartment conversions. The reasons are straightforward: keeping plumbing centralized, which often aligns with existing office layouts, and maximizing the number of units per floor by creating smaller living spaces. Each floor could accommodate three times the units compared to a conventional apartment setup, increasing affordability and accessibility.
Market and Investment Appeal
From an investment perspective, co-living conversions offer several advantages. They maximize the number of rental units within a single structure, boosting rental revenue potential. The communal living style may also appeal to specific demographics, including young professionals, students, and service workers—groups traditionally more open to lower-cost housing options with shared amenities. For cities struggling with housing shortages, particularly for smaller and more affordable units, co-living could fill a critical gap in the housing supply.
Developers and investors stand to benefit from the lower upfront costs while maintaining solid occupancy rates due to the demand for well-located, affordable housing. Additionally, co-living spaces align well with urban redevelopment goals, offering a way to breathe new life into stagnant downtown areas by creating vibrant communities.
Addressing the Affordability Challenge
The affordability angle is a key selling point. As rents continue to rise, affordable housing becomes increasingly crucial for many urban centers. Co-living spaces, which save on construction costs, have the potential to pass on those savings to renters. Lower rent levels not only provide a competitive edge but also make co-living projects an attractive target for municipal incentives or subsidies aimed at increasing the supply of affordable housing.
For cities, investing in co-living conversions means a greater return on subsidies. The report notes that for the same subsidy required to create a single studio apartment, multiple co-living units can be created. This efficiency is especially valuable in regions where budget constraints limit affordable housing development.
Challenges and Roadblocks
Despite the potential, several challenges complicate the transition from traditional offices to co-living spaces. The regulatory landscape remains one of the biggest obstacles. Zoning laws in many cities are not well-adapted to co-living configurations, often requiring residential units to have minimum sizes or prohibiting shared bathroom and kitchen arrangements. Additionally, parking minimums, mandated by some cities, can hinder adaptive reuse, as many urban projects cannot meet these requirements without sacrificing valuable floor space.
There’s also a social and cultural hurdle: convincing tenants to embrace co-living, particularly for those used to traditional apartment living. Co-living isn't designed for families, and while young professionals or retirees might find it appealing, the model might struggle to gain traction among other demographics.
Developers might also find it difficult to secure financing for co-living projects due to uncertain return rates. Investors seeking high yields may hesitate, as these conversions often target lower rent thresholds to maintain affordability. Unless there are creative funding solutions—like below-market-rate loans, municipal subsidies, or philanthropic grants—the financial viability may not align with typical private equity expectations.
Cities Poised for Co-Living Growth
The Pew and Gensler report examines cities like Denver, Seattle, and Minneapolis as potential candidates for successful co-living conversions. These cities already face housing pressures and have urban centers with underused office stock. The demand for affordable units is high, particularly for one- and two-person households. Additionally, these cities have shown a willingness to explore adaptive zoning, making them ideal testing grounds for innovative housing solutions.
While no large-scale conversions have yet been completed in the U.S. under this model, there’s growing interest. The success of pilot projects will depend on local regulations, the ability to attract target demographics, and the willingness of cities to relax restrictions on unit size, parking, and shared facilities.
A Broader Impact on Urban Centers
Adopting co-living as a mainstream housing model could have wide-reaching implications for cities. Office-to-co-living conversions could help diversify urban housing options, drive foot traffic, and support downtown economies. By creating a more affordable entry point into the housing market, cities might reduce inflows into homelessness, mitigate displacement, and foster greater socio-economic diversity.
Yet, it’s clear that co-living alone isn’t a panacea. It can’t accommodate families, and it may not be ideal for those seeking long-term stability or privacy. However, it does provide a quick, efficient solution to urban housing challenges, particularly in areas where there’s significant demand for small, well-located homes.
Moving Forward: What Investors Should Consider
For investors interested in co-living, due diligence is critical. Factors like local zoning regulations, financing options, and target demographics must be carefully evaluated. Assessing a building’s adaptability—whether it can easily transition to co-living without excessive structural modifications—is key to controlling costs. Engaging with local municipalities about potential incentives or subsidies can also provide a clearer path forward.
Investors should also consider the reputational aspects. Co-living is often associated with affordability and addressing urban housing needs, aligning with ESG (Environmental, Social, and Governance) objectives, which may attract a wider array of capital sources interested in socially responsible projects.
A Niche Solution with Wide Implications
Dorm-style co-living isn’t a one-size-fits-all answer, but it presents a viable option for utilizing surplus office space and addressing affordability in housing-strapped cities. While the concept requires navigating regulatory landscapes, cultural attitudes, and financing hurdles, its potential for providing cost-effective housing in urban centers is significant.
For investors, cities, and developers alike, co-living conversions represent a creative, forward-thinking solution to the challenges of vacant office space and urban housing shortages. With careful planning and collaboration, it could be a game-changer in reshaping the future of cities.
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