Office buildings losing tenants are increasingly becoming conversion targets in major commercial real estate markets. Investors and developers are increasingly buying underused properties with plans to turn them into apartments, mixed-use projects, data centers, and other uses, according to BisNow.
The activity is helping remove aging office inventory from a sector still dealing with elevated vacancy rates following changes in workplace demand.
More office space leaves the market
According to Avison Young, the amount of office space tracked nationally fell by more than 2% quarter-over-quarter, with roughly 111 million square feet removed from inventory. While not all of that came from conversions, the reduction comes as landlords contend with a 22% national availability rate.
Residential conversion activity also continues to increase. RentCafe data shows planned apartment units tied to office conversions rose 28% year-over-year to 90,300 units. Office projects now account for nearly half of adaptive reuse activity nationwide.
Demand concentrates in newer office buildings
Companies continue moving toward newer, higher-quality offices while older properties struggle to compete. In gateway markets, 81% of first-quarter leasing volume went to Class-A buildings, with a large share concentrated in a small number of top-tier properties.
At the same time, much of the available office inventory is considered increasingly difficult to lease due to age, design limitations, or location.
Conversions expand beyond housing
Many early conversion projects focused on apartments and condos, particularly buildings with layouts suited for residential use, including narrow floor plates and large window lines.
As those properties become harder to find, developers are exploring other uses. Some former office buildings are being converted into data centers, while others are becoming self-storage facilities or mixed-use projects.
Financing conditions delayed earlier activity
Conversion interest emerged during the work-from-home period, but higher interest rates and financing challenges slowed projects in 2021 and 2022. Buildings with remaining tenants also created complications, since existing leases often made redevelopment difficult or expensive.
As more leases expire and occupancy falls further, additional properties are reaching the market vacant and ready for redevelopment.
Chicago and Washington emerge as conversion hubs
Chicago has become one of the country’s largest office conversion markets, with a pipeline of more than 5,000 planned residential units. The city continues to face elevated office availability, particularly in older downtown buildings.
Washington, D.C., is also seeing growing conversion activity as office demand remains concentrated in newer trophy properties. Developers there are pursuing both residential conversions and new high-end office projects aimed at companies seeking premium space.
Future office demand becomes more concentrated
The conversion trend is narrowing the office market around newer and better-performing buildings. Older offices in central business districts are increasingly being repositioned for other uses as workplace demand continues concentrating in a smaller group of top-tier properties.
