Office-to-Resi Conversions Might Save Downtowns and Help Alleviate Housing Shortage
By Michael Lucarelli April 19, 2023 11:45 amreprints
Demand for rental housing has arguably never been higher. Current mortgage rates of about 6 percent have caused a 24 percent drop in pending home sales, about 16 percent fewer homes being listed for sale, and 9 percent of sellers switching from “for sale” to “for rent,” according to the National Association of Realtors’ data.
It also means there are 32 percent fewer active buyers compared to last year, with many renting to save until rates decrease, according to Money.com. This dynamic has made the rental market increasingly more competitive, leading average monthly rents to climb 6.9 percent year-over-year to $1,970 across the U.S., according to Rentcafe, with an average of eight renters competing for one vacant apartment.
Between high rent prices and even higher mortgage rates, many consumers, businesses and legislators are desperately seeking solutions to create more affordable housing options.
One practice that could bring some relief and provide much-needed rental space are office-to-apartment building conversions. Many cities across the U.S. are struggling with largely empty central business districts (CBDs) as a large number of people continue to work from home in the wake of the pandemic. That in turn has resulted in more unused office space, especially in CBDs. Last year, the national office vacancy rate reached an almost three-decade high of roughly 17 percent, according to a report from CBRE (CBRE).
Hence, office-to-residential conversions — albeit quite challenging and costly, as they require new plumbing and electrical installations, among many other extensive logistics — might spell some relief in metros such as Los Angeles. L.A.’s downtown has suffered from a monumental office vacancy, which was close to 23 percent as of the fourth quarter, according to research from JLL (JLL). Yet parts of Downtown L.A. have been doing quite well, namely the Arts District, given its much larger residential component and the resulting ancillary services, such as food & beverage and retail, as compared with the neighboring CBD.
Some cities, such as Washington, D.C., have had similar struggles and are starting to take the leap to residential conversions. The city is currently converting five office buildings into rental housing in the “Golden Triangle,” its CBD.
Here in California, the so-called Office to Housing Conversion Act could help the push toward conversions. The bill is intended to make it easier to convert office space into housing in a state that has long struggled with a well-documented housing crisis. The proposal would try to ensure that the permitting process and local zoning laws aren’t hampering conversions. According to a RAND Corporation study, as many as 2,300 potentially underutilized commercial properties could result in between 72,000 to 113,000 rental units in Los Angeles County.
One thing is for sure: About 34 percent of people in the U.S. today are renters (that number is actually closer to 45 percent in California), and with current mortgage rates and affordability issues unlikely to diminish, this number is only going to increase. Therefore, any opportunity to provide additional rental space and to alleviate the housing shortage in this country is worth exploring.
Michael Lucarelli is the CEO of RentSpree.