During the pandemic, U.S. workers turned their homes into offices. Now, office buildings turned into homes could be a major real estate trend.
Remote work emptied office buildings across the country. Commercial vacancy rates are higher than they've been in years. Developers are ready to convert vacant office buildings into homes and mixed-use developments. This brings American downtowns back to their historical roots. And it makes these neighborhoods more accessible for residents.
Vacant office buildings during the pandemic
The rise of remote work during the COVID-19 pandemic led to the emptying of office buildings. It changed the atmosphere and character of downtowns across the U.S. overnight. Downtown Seattle felt the effects of the pandemic first.
“We were the first downtown to really feel the economic effects from the pandemic in North America," explains Jon Scholess, president and CEO of Downtown Seattle Association. “March 5 was the day that a number of major employers ordered their workforces to work from home. So, the effects were pretty immediate in a downtown with 350,000 jobs. And 75 percent of those can be performed remotely, so the sidewalks got quiet real fast."
Some businesses had work-from-home procedures and policies already in place. Others scrambled to adjust. Few could have imagined that remote work would become the default mode for months.
“COVID accelerated the trend of technology-based remote work," says David Downey, president and CEO of the International Downtown Association. “We all had access to Zoom and Teams and online collaborative software, but until we were forced to work from home, we didn't all learn how to use it. It was always part of the workforce future, but it was accelerated because of the necessity."
Commercial vacancies increase
As more workers stayed home, their former office buildings stood empty. The most recent Cushman & Wakefield MarketBeat report revealed that 17.2 percent of U.S. office buildings were empty during the second quarter of 2021. This is the highest vacancy rate since it peaked at 17.3 percent in the third quarter of 2010.
Another 18 markets reported office building vacancy rates above 20 percent. That's up from 12 markets during the first three months of 2021. Every region of the country is affected, from Brooklyn and Philadelphia in the east to Los Angeles and San Francisco in the west. Houston, Chicago, Atlanta, Denver, Dallas, Cincinnati and Minneapolis also report high vacancy rates.
By the end of 2020, 137 million square feet of office space was available for sublease, according to the CBRE Group. That's the largest number since 2003 — and an increase of 40 percent from 2019. Yet, commercial rents are still going up.
Commercial rents increase
“Despite rising vacancy, national asking rents continued to increase, up 0.9 percent quarter-over-quarter as landlords have been reticent to drop top-line rents and new construction has been coming online at higher-than-average prices," explained the Cushman & Wakefield MarketBeat report.
That's bad news for business owners. But it's good for renters who want a unique place to live. That's because empty or overpriced office buildings can become new homes.
Adaptive reuse transforms empty offices
Taking an existing office building and turning it into a home is an example of adaptive reuse. Adaptive reuse means converting an existing building into a different form. It then serves a new function.
The conversion of warehouse spaces in Manhattan in the 1960s kicked off the trend. But any type of building can transform in this way. With a little imagination, a hotel, school, church, factory or office building can be turned into a home.
The structure can also become a mixed-use building. A mixed-use building combines residential, commercial and community spaces. That means renters can live, eat and shop under one roof.
The benefits of converting office buildings into homes
Location is a key driver towards the trend of converting office buildings into residential communities.
“Adapting an existing building for a new purpose is immensely beneficial," says Heather Klejnot, community manager with ModelGroup, which has created mixed-used projects in several states. “First, location, location, location — and the potential of recreating density in areas that once were bustling with activity. Second, you have a gift (in most cases) of starting with stunning historical buildings with intricate details on the interiors and exteriors that become works of art in themselves when preserved. Existing buildings typically have the benefit of usable, existing infrastructure like the roads and city lights, as well. Not to mention the cost savings of not having to build what is already usable."
Sustainable and good for the environment
Adaptive reuse can be environmentally friendly and sustainable. It remodels structures that already exist instead of using resources to build a new home. Improvements often make apartments more environmentally friendly. That's important to renters who want to reduce their environmental impact.
Office buildings are already located in established neighborhoods. They're close to services, transportation and other amenities. So, renters can be part of the community from the moment they move in. A walkable neighborhood with accessible public transportation means residents can drive less. Some get rid of their cars altogether. That saves renters money and time. It's great for the environment, too.
Authenticity and character
Density means there's a high concentration of people, businesses and services in an area. This is convenient for renters. It also makes a neighborhood feel interesting. The building themselves are often interesting, as well.
“Adaptive reuse has been a key driver for anyone who's looking for authenticity, the culture of the area, something that is unique," says Downey. “They tend to be something that has a little bit more grit to it, rather than a sterile, pristine environment."
Developers target Class B and Class C office buildings for adaptive reuse. They're usually older structures with more historical character. So, adaptive reuse helps preserve a city's historic buildings. It also highlights a neighborhood's distinct culture.
The draw of high-density, walkable downtowns
City planners created American downtowns as mixed-use zones. They're designed so people can work, shop and gather a short walk away from home. Offices turned into homes allow more people to live in these walkable neighborhoods.
“The millennial generation and Gen Z are still very interested in a live/work/play urban environment, as are the aging baby boomers and empty nesters who want to be within walking distance of services and transit," explains Downey. “I think the combination of multiple mixed-use facilities throughout neighborhoods builds in in the diversity and availability of services that allow the neighborhood to be more dynamic and complete."
Walkable downtowns are convenient. They help residents stay fit and active. And they reduce the need for a personal vehicle, which is better for the environment. Walkable neighborhoods even appeal to our sense of adventure.
“The general theory of walkability explains how, to be favored, a walk has to satisfy four main conditions," says Jeff Speck, author of “Walkable City: How Downtown Can Save America, One Step at a Time." “It must be useful, safe, comfortable and interesting."
Scholess says that vibrant downtowns like Seattle blend work, play and tourism — creating a neighborhood that's always changing. Residents, visitors and workers are enjoying a diverse neighborhood's unique energy.
“It's the combination of that big, grand experience you came for — the great dinner, the big event, the big celebrations — but also those 'surprise and delight' moments that are not planned," Scholess says. “You come downtown with no plans and you wander. You experience people who aren't from your neighborhood, who aren't from your same socioeconomic strata. That mixing is hard to find in other places that people live in our city. The downtowns that do it right reflect the diversity of the region and bring all those people together."
Diverse neighborhoods help cities thrive
Downtown districts across the country suffered when the pandemic shut down offices. But neighborhoods that balance commercial and residential properties are bouncing back.
“Those urban centers that already had increasing residential were more fortunate through the pandemic than the single-use urban centers that didn't have that residential population," explains Downey. “A wonderful comparison would be Midtown Atlanta, which did better than downtown Atlanta because of the residential base."
Scholess says downtown Seattle's residential base kept the neighborhood going last year. The district did lose some residents in 2020. But the population increased this year, even though only 24 percent of workers are back in the office.
“We're close to about 100,000 people living in the greater downtown, a record number," says Scholess. “There are more people living downtown now than ever."
The challenges of converting offices into homes
Renters love the convenience and the amenities of walkable urban centers. And combining commercial and residential properties can help build more diverse, resilient neighborhoods. So, why don't developers take more unused offices and turn them into homes?
The answer is complex, but, in general, repurposing office buildings into apartments has a few specific construction challenges.
“Building codes have changed, so making sure the buildings balance function while meeting updated building and safety codes can be challenging," explains Klejnot. “In addition, the layout of utilities, walls, windows, etc. were all built out with a different purpose, so creatively laying out apartments into these spaces is like fitting a square piece into a round hole. It takes a lot of thoughtfulness of the resident's experience to ensure the best end result."
Pandemic-related labor shortages haven't helped. Supply chain issues lead to delays. And the cost of building supplies has increased during the pandemic.
Cost is a major factor for developers. That's why Downey is championing the Revitalizing Downtowns Act of 2021. This proposed federal tax credit would help convert vacant offices. If passed, it would cover 20 percent of qualified adaptive reuse expenses.
“We know that all development projects are extraordinarily costly — and even more so when it's adaptive reuse," says Downey. “A credit on 20 percent of the qualified expenses is not a silver bullet. It is one more financing tool that will help bridge a gap."
Converting office buildings into homes during a pandemic can be expensive. And some developers pass those costs on to renters. That's why adaptive reuse tax credits and downtown associations include affordable housing language. It ensures that people from all walks of life will have the chance to live and work together.
“We're not affordable housing experts, but we know it's a critical part," Downey explains. “Walkability (and affordability) is a necessity in moving this forward. We're just trying to build great cities for everybody."
Adaptive reuse advocates around the country are funding their projects in creative ways. Some apply for grants and take advantage of tax credits. Others work with non-profit organizations and environmental groups. Cooperation and communication are important.
“Investment alone is not enough," says Klejnot. “We must understand the needs of a community and thoughtfully design a development around that. Partnering with key stakeholders, organizations and government entities is key.
Are office buildings turned into homes the future?
Adaptive reuse won't end the affordable housing shortage that's plagued the U.S. for decades. And not every office building can be turned into a home. But converting some unused offices into apartments gives empty buildings new life.
American downtowns were created as mixed-use zones. A mix of commercial and residential spaces sustained U.S. cities through the pandemic. Sustainable, adaptive reuse projects can help neighborhoods thrive in the future, as well.