The multifamily market continues to cope with high demand and insufficient supply, which is leading to new solutions, such as converting office space to residential units.
Experts have pointed out a shortage of apartment units in the U.S. an estimated 4.3 million more U.S. apartments must be built by 2035 to meet the robust demand for rental housing, according to the National Multifamily Housing Council. The Council reports that developers must build an estimated 600,000 additional units to meet the shortage due to a construction decline after the 2008 financial crisis. The shortage of new housing has raised housing costs. As a result, the number of affordable apartments (monthly rents below $1,000) declined by 4.7 million from 2015-2020, according to the Council.
One solution to the multifamily housing shortage is converting commercial office space into residential units. Most experts agree that throughout the U.S. there is a large and growing number of obsolete buildings. This is especially true with older, class B/C office buildings becoming functionally obsolete as overall demand for office space has slowed post-pandemic. In addition, companies prefer to rent space in newer buildings with the latest amenities. New York City, Los Angeles, and Chicago have the most older office buildings with large vacancies. Other cities with significant vacant office space include San Francisco, Austin, Seattle, and Dallas.
In fact, JLL Research discovered that between the beginning of the pandemic and 2022’s second quarter, buildings delivered in 2015 or later had 86.8 million square feet of net absorption, while pre-2015 buildings had net negative absorption of 246.5 million square feet. Almost 80% of the negative net absorption was in buildings delivered in 1980 and earlier.
JLL adds that globally, these older buildings will require extensive investment and renovation to remain competitive. Of the 776 million square meters of existing office space in 66 global markets globally, JLL estimates that about 322-425 million square meters, or half of that space, will likely need substantial investment to remain viable in the near term. JLL estimates it will require an investment of approximately $933 billion-$1.2 trillion in spending.
Office to Rental Conversion Trends
Due to these trends, about 30% of older office building stock in some of the largest U.S. and Canadian cities may be suited for conversion into apartments, according to real estate company Avison Young. Conversions could revive business districts in cities where many workers work from home full-time or a few days a week.
The firm identified 6,206 buildings across 10 U.S. cities that could be well suited for conversion to multifamily. What these buildings had in common is that they were built before 1990 and have floor sizes smaller than 15,000 square feet. In contrast, buildings that have larger floors are more difficult to subdivide to create living space. In another estimate, more than 1.2 billion square feet of U.S. office space (or 14.8% of total office inventory) is considered suitable for conversion, as sourced from the Conversion Feasibility Index (CFI) from CommercialEdge.
CBRE writes that several factors should be considered when evaluating a building’s suitability for conversion, such as its configuration, floor size, depth, and ceiling height. Standard office floors are about 100 to 150 feet long, while typical apartment floors are 65 to 75 feet.
According to Avison Young ‘s analysis, New York City has the most older buildings available at 1,698, which is not surprising because it’s the largest U.S. office market with 975 million square feet. Manhattan is home to the nation’s largest office conversion project. Developers are transforming a 1.1 million-square-foot office tower at 25 Water Street in the financial district into 1,300 apartment units. Los Angeles comes in second with 1,212 older buildings, and Chicago is third with 1,030.
The number of office building conversions to multifamily has been steadily increasing in the past nine years. However, it’s still a relatively small percentage of the country’s overall space footage. The 71 million square feet of conversions planned or underway in 2025 represent 1.7% of U.S. office inventory, according to CBRE, but the trend is positive.
In late 2024, developers had completed 73 conversions, and another 30 were scheduled for completion by year-end, the most since the firm began tracking conversion projects in 2016.
The conversions are receiving a boost from city governments. For example, in New York City, converted buildings with at least 25% affordable apartments are eligible for up to 90% tax exemptions. Likewise, Washington, D.C., introduced a Housing in Downtown program, offering 20-year tax abatements for commercial-to-residential conversions.
CBRE also reports that from 2016 to late 2024, office-to-multifamily conversions increased U.S. multifamily supply by 28,000 units. Another 38,000 will be built if all projects on the books in November 2024 are completed this year.
Latest Statistics
The research site RentCafe conducts extensive research on the office-to-residential conversion trend. The firm’s latest report stated that the number of office spaces scheduled to become apartments grew from 23,100 in 2022 to 70,700 in the pipeline this year. Office conversions now account for almost 42% of the nearly 169,000 apartments in “future adaptive reuse projects,” according to RentCafe.
RentCafe reports that the New York metro area has the most units set to be renovated into apartments nationwide, 8,310. Washington, D.C. is second, while Los Angeles is third with 4,388 planned conversions. Big urban hubs like Chicago, Dallas, and Atlanta also follow the national trend and embrace office-to-apartment conversions. RentCafe reports that many office conversions are also in the works in many U.S. metro areas, including Minneapolis, Charlotte, Kansas City, MO, and Phoenix.
Costs of Conversion
Companies actively transforming older office buildings try to purchase them at a significant discount. For example, in Washington, D.C., Philadelphia developers Post Brothers paid about $66 million for 2100 M Street in 2023, which previously sold for $150 million in 2007. CBRE estimates that conversion and renovation costs can range from $100 to $500 per square foot, depending on the job and building factors. However, developers in New York City report conversion rates in the $300-$500 range.
CBRE reported that office-to-multifamily conversions “require significant capital to add more plumbing, HVAC, light, kitchens, bathrooms, and finishes. Additionally, zoning variance approval may be required when changing from a commercial to residential use.”
A Transformative Opportunity in Class A Office-to-Multifamily Conversion:
Caliber’s Canyon FundCo, LLC Project
Investors who want to participate in an office-to-multifamily conversion opportunity in Phoenix may be interested in learning about Caliber’s Canyon FundCo, LLC Project. The properties were purchased at what is believed to be a significant discount to replacement value. The fund provides the opportunity to leverage the potential of converting two predominantly vacant Class A office buildings of about 311,706 square feet into vibrant multifamily housing within an Opportunity Zone in Phoenix.
As a result, they are classified as a Qualified Opportunity Zone Business, making it available for investment from Opportunity Zone Funds.
The acquisition includes about 17.99 acres of land, two separate Class-A, multi-story office buildings totaling about 311,706 square feet, and two multi-story parking structures. The opportunity also has an option to purchase an approximately 6.41-acre vacant land parcel within the revitalizing Metrocenter/Villages I-17 submarket. The properties are also located in an Opportunity Zone
The benefits of the investment include the property’s cost-effective adaptive reuse and potentially obtaining access to compelling tax advantages that are not possible with new construction.
A Prime Location in a Thriving Economic Hub
Located just 20 minutes from the $65 billion TSMC semiconductor factory—a project that will create 6,000 direct jobs and 20,000 indirect ones—the property is ideally situated to meet the soaring housing demand due to this significant economic development.
Flexible and Lucrative Exit Strategies
With separate tax parcels, the property offers exceptional flexibility in exit options. The vacant land parcel has not yet been purchased. However, Caliber has the option to acquire it, creating opportunities for future sale or development and unlocking additional revenue streams or financing solutions.
Exclusive Tax Benefits for Investors
Invest through your own QOZ fund or through Caliber’s Tax-Advantaged Opportunity Zone Fund II to access significant tax incentives, including the deferral of capital gains taxes and the potential for tax-free appreciation, enhancing your financial returns.
Contact our team to learn how Caliber can help you access professionally managed, institutional-quality real estate investments such as Caliber’s Canyon FundCo, LLC project.
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About Caliber (CaliberCos Inc.) (NASDAQ: CWD)
With more than $2.9 billion of managed assets, including estimated costs to complete assets under development, Caliber’s 16-year track record of managing and developing real estate is built on a singular goal: make money in all market conditions. Our growth is fueled by our performance and our competitive advantage: we invest in projects, strategies, and geographies that global real estate institutions do not. Integral to our competitive advantage is our in-house shared services group, which offers Caliber greater control over our real estate and visibility to future investment opportunities. There are multiple ways to participate in Caliber’s success: invest in Nasdaq-listed CaliberCos Inc. and/or invest directly in our Private Funds.
Investor Considerations
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
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