Property owners of old or obsolete office buildings are turning their obsolescence blues into multifamily gold.
According to a study by Newmark Knight Frank, 8% of the nation’s office inventory is obsolete, meaning building owners need to find new ways to make money off of their spaces.
Thanks to big time demand for downtown housing and an overall housing shortage, property owners saddled with a struggling office building have been able to successfully flip their defunct office properties and turn them into multifamily developments to capitalize on the demand for multifamily housing in walkable submarkets.
According to the report, this will continue to be a nice safety net for infill office properties as renters continue to show strong preference for urban product.
Baltimore’s central business district has been a strong case study for the efficacy of office-to-residential conversions.
To help pique the interest of investors, the city of Baltimore employed tax incentives for adaptive reuse projects in the CBD where there was a glut of underperforming office buildings and a lack of housing. NKF analyzed a sample of four office buildings that underwent conversions in Baltimore's CBD and found that all four outperformed the submarket’s average multifamily housing rental rate. On average, the properties had rents 8.19% higher than the submarket average as of Q1 this year.
It is important to note that though adaptive-reuse can be a good way to revitalize returns-on-investment for a struggling building, not all office buildings are fit for residential conversion. Floor height, column spacing and slab type must all be considered in the decision to initiate an adaptive-reuse project like this.