Calif. Office-to-Apartment Projects Edged Out Hotel Conversions in 2023: Report

State flipped office and hotel space in more than 8,000 rental units last year

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Office-to-residential conversions are the new golden child of the Golden State’s adaptive reuse sector … for now. 

Nationally, hotel-to-residential conversions dominated 2023’s adaptive reuse pipeline. In California, however, office-to-residential projects pulled ahead, according to Rentcafe’s annual Adaptive Reuse Report, which analyzes Yardi Matrix data. 

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Specifically, 31 percent of California’s nearly 14,000 commercial-to-apartment projects were conversions of office space. That means, the state has 4,306 apartments in various stages of development, all being created from emptied office space. For comparison, office transformations accounted for roughly 28 percent of the nation’s total adaptive reuse endeavors, with projects designed to convert hotels to residential housing making up 36 percent. 

In fact, hotel-to-residential projects are currently at an all-time national high, the report says, with 4,556 apartments created in 2023. Nationally, developers transformed 3,587 offices into apartments. 

That’s not to say hotel-to-residential conversions fared poorly in California. Rather, such endeavors trailed only slightly behind office conversions. The state logged 3,752 hotels-turned-apartments last year, for a 21 percent share of California’s total adaptive reuse projects. 

Not far behind, California’s health care and retail projects saw slightly lower levels of activity; 2,358 health care and 1,540 retail conversions occupied 17 and 11 percent of the state’s totals, respectively. Miscellaneous projects, including warehouses, factories and religious buildings, rounded off the state’s remaining 14 percent of developments. 

Given real estate’s struggles post-pandemic, the dominance of both hotel and office conversions speaks to larger industry trends. Adaptive reuse projects boomed in 2019 and 2020, only to experience a slowdown in 2021 and 2022, per the report. The 2023 data ultimately positions the sector on the up and up, with 17.6 percent more apartments adapted last year than in 2022. 

“Overall, the movement towards repurposing unused commercial spaces into residential units is a significant trend in California’s real estate landscape, driven by the need for more housing and the changing dynamics of workspaces post-pandemic,” Doug Ressler, manager of business intelligence at Yardi Matrix, told Commercial Observer via email.

Ressler also highlighted the Middle-Class Housing Act of 2022, which has spurred the conversion of office and retail space into affordable housing. 

As for the geographic breakdown of 2023 conversions, office-to-apartment conversions created a commonality across California, though the sector’s highest level of activity occurred in Alameda, not far from Oakland. There, developers transformed a former warehouse into 372 apartments, which ranks the city just behind Manhattan and Richmond, Va., in developing the country’s highest number of completed, repurposed apartments.  

Although far more populated than Alameda, Los Angeles developed just 182 new apartments, converted from three military buildings. San Francisco developed 180 new apartments out of an unused office building. 

Yet those statistics may change, as Los Angeles is the anticipated national frontrunner for future adaptive reuse activity. The report lists the City of Angels as No. 1 in a list of top 20 cities for future apartment conversions, with 5,881 projects expected in L.A. Fewer than 2,000 of those, however, will transform from offices. The nature of the city’s remaining adaptive reuse projects is unclear. 

Los Angeles is a hot spot for conversions, thanks in part to the city’s Adaptive Reuse Ordinance. Adaptive reuse projects can address housing needs, respond to post-pandemic struggles for retail and office, and promote sustainability efforts in Los Angeles, Ressler said. 

Trailing Los Angeles in California’s anticipated activity, Fresno anticipates 1,111 conversions in the next year, while Sacramento, San Diego and San Jose likewise have hundreds of reuse projects in progress. 

Anna Staropoli can be reached at astaropoli@commercialobserver.com.