Will Office Be Converted To Fix the Housing Problem? Probably Not, according to the Fed

The office market is too unstable to be a significant supplier of new housing.

The topic of whether conversions could succeed frequently arises in any discussion about housing shortages in a CRE context. Take a look at all the office supplies that are waiting for someone to return to work. How about solving two issues at once: the demand for housing and the desire to make existing office stock profitable? Let’s convert buildings, turn them into flats, and rent them out.

Anthony Orlando, an assistant professor at CalPoly Pomona, and Chris Cunningham, a research economist at the Federal Reserve Bank of Atlanta, have examined the possibility of office conversions meeting housing demand for the bank.

In spite of the Fed, there are still concerns. Many office buildings won’t ever be suitable for uncomplicated housing conversions. It can be challenging to make them physically functional if they are not rectangular with corridors leading to rooms on either side or if there are columns everywhere. Who would desire a windowless flat in the heart of a structure? There are also some localities that oppose conversions because they earn more tax money from corporate use and need the money desperately.

Leaving that aside, they both brought up some interesting issues. For instance, “SupplyTrack revealed that an average of 2,300 multifamily units were built monthly out of previously used office, warehouse, or industrial space between 2007 and 2019.” Existing structures make up 3% of total housing units in buildings with five units or more, or historically, 10% of newly supplied multifamily housing, existing structures make up 3% of total housing units.

For conversions to significantly alter the housing supply, they would need to soar into the air.

A different argument, though, was even more convincing. A significant portion of the work-from-home market, which is influencing the office market, is hybrid work. According to the researchers, “Hybrid work may boost productivity or increase the surplus for employees, but it may not actually free up much conventional office space.” This is because if people are still coming in, especially if significant numbers of them do so on particular days, businesses will still need places to put them. The two wrote that “[t]he hybrid approach appears to be delaying the wholesale conversion of offices to rental.” In any event, it doesn’t seem realistic that office conversions will soon slow rental growth.

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