Saving Downtowns by Converting Office Space to Apartments

The downtown office worker has, in general, become accustomed to working at home. Many have scattered to the suburbs. For them, there is no going back. This migration has left acres of office space vacant in every city in the United States. But there are those who miss being in their offices, the views of the cityscape, the variety of places available for lunch, happy hours after work, the bustle, excitement and other charms of city life. For them, a solution presents itself: converting office buildings into residential buildings and letting them live and work downtown.

Converting office buildings into residential buildings is at a loud buzz and usually most of it about housing the homeless. In his ill-fated plan to buy Twitter, Elon Musk joked that he would take Twitter headquarters and turn them into a homeless shelter. Maybe realizing that homelessness was no joking matter, Musk deleted his tweet, but well-meaning others continue to see housing the homeless in mostly vacant high rises as an obvious solution to two problems.

It’s been 10 months since we predicted a commercial real estate apocalypse here. We had learned of Autodesk giving on occupying renovated office space on Mission Street, near their Market St, San Francisco headquarters, upon realization that workers were not coming back to the office any time soon.  Upon investigation, it became obvious that this was a city-wide and nation-wide phenomenon. Large swaths of office space were unused, which led to a glut of available office and lower rents across the board. There was also a ripple effect. Less workers downtown meant less restaurant takeout, less parking garage business… Eventually, there would be less construction and remodeling. Would downtowns become ghost towns?

“High office vacancies threaten the finances of building owners. They harm the economies of cites such as New York and San Francisco, which rely on cubicle farms to pay taxes and sustain nearby shops and restaurants,” says Konrad Putzier in the Wall Street Journal[i].

According to the WSJ, the office apocalypse started in 1981 when the Reagan administration passed a law to let building owners take depreciation much more rapidly. But could it have been far earlier, like with the advent of the Internet and the laptop? It was then that you could work from home – at least theoretically.

Old habits die hard, though. A few would occasionally attempt to work from home, but for the most part, work at the office was di rigueur. It took a pandemic to break us of the habit. The risk of airborne infection prevented us from getting in subways, carpools, elevators or meetings. We had to work at home. Our diehard bosses had no choice but to let us.

Sure, there are fewer choices for lunch, but homemade chocolate chip cookies can compensate. We remember the city as gritty, our commutes as grinding, and our lunches as expensive.  

The dotcom boom also helped create the office space glut. There was a mad rush to build office space or convert warehouses, shops, garages, lofts, decrepit waterfront property—almost any space—into office space.

For 20 years or so before the pandemic, life was good for downtown property owners and office workers. The Salesforce tower near Autodesk’s HQ commands a view of the San Francisco Bay and the Bay Bridge, a view few of its workers could afford on their own. Lunch was picked from any one of a hundred restaurants or the Ferry Terminal. Sushi, Thai, salad, Blue Bottle coffee, whatever…

But many of the Financial District’s restaurants would not survive the pandemic.

Lyft, the ride sharing company a few blocks from Autodesk, is to unload 45% of their corporate office space, dumping 275 thousand square feet onto the existing glut of office space in San Francisco, Seattle, New York and Nashville, upon realizing that 4,000 of its workers would work from home indefinitely.

Salesforce and Yelp will also be jettisoning office space.

A study of 10 metropolitan areas by Kastle Systems, a security firm that tracks office workers ins and outs from their card swipes, found 45% of office space occupied, a 95% drop since the pandemic started.

Has it hit bottom? Not yet, says a CBRE study, which found that 52% of companies want to cut back on office space over the next 3 years.

With so much office space available, it certainly makes no sense to add to it. Amazon paused its plans for 6 office towers (5 in Belleview, Washington and 1 in Nashville) while it reevaluates the need for office space with a hybrid workforce. New office construction has all but stopped in the Washington, DC area, where, before the pandemic, between 1 and 2 million square feet of office space were being added per year.

With millions of square feet of space not needed for offices, why not convert it to residences?

For one thing, many owners still cling to hope that the high-paying office client will return in full force. Office space rents for far more per square foot than residential space, so converting offices into apartments makes no sense. Also, developers say conversions are not as easy as they sound, as told in this 2020 article about the lack of conversions in San Francisco.

There are a hundred reasons to not convert: earthquake retrofitting, where to put all the bathrooms, kitchens, zoning… and inertia. Commercial builders may not be able to execute a conversion. They can’t imagine how offices could be turned into apartments, nor is it in their skill sets. For them, it may be easier to do demolition and start from scratch.

Here, Kit Switch, a San Francisco startup, raises its hand. They make modular wall panels complete with cabinets, fixtures, wiring and plumbing, ready to quickly convert bare office space into homes. Autodesk is listed under the startup’s “Supporters and Partners.”

However, circumstance and necessity can combine to change perception. What may have seemed hard to do before the pandemic seems much more feasible after a year or two of zero office rental income and the growing drumbeat of a housing shortage.

After a 2021 study found that converting just 10% of New York City’s buildings could create 14,000 new apartments, New York’s city council passed a law this year that requires the city to “study options and make recommendations” for commercial buildings that could be converted to apartments. Los Angeles did a similar study and determined that hotel and office conversions would add over 70,000 housing units.

It may be starting to happen. A total of 150 apartment conversions took place in the US, with over 40% of the converted being office buildings, six times the number of conversions in the decade previous, according to RentCafe.  The future of conversions looks brighter yet, with 52,700 apartments to be converted starting 2022, a quarter in office buildings.