According to global property consultant CBRE, U.S. office conversions are on pace to more than double their recent annual average this year, with momentum picking up due to increased incentives and other support from state and local governments.
CBRE analyzed the number of office conversions in major U.S. cities since 2016 and found nearly 100 projects are expected to be completed this year. This a sharp increase from the annual average of 41 completed from 2016 to 2022.
Across 40 CBRE-tracked markets in the U.S., 60 million sq. ft. of office conversions are planned or in progress, comprising 1.4% of the total U.S. office inventory, up from 1.2% in last year's fourth quarter.
Nearly half (48%) of office conversions this year are to multifamily residential complexes. Office-to-mixed-use conversions are becoming more common, accounting for 18% of the pipeline, up from 7% in Q4 2022. Meanwhile, conversions of offices to life sciences labs now account for 19% of activity, down from 28% in last year's fourth quarter.
Recently, major cities like New York and Chicago have passed zoning code changes and established public-private partnerships to make conversions more financially feasible. Such incentives are typically targeted at converting office buildings to much-need affordable and/or zero-emissions housing.
"Converting offices to other use types is a complex process with many different moving parts," said Mike Watts, CBRE President of Investor Leasing. "When state and local governments are supportive of the projects, it signals to developers that efforts are underway to make the process more financially feasible and predictable. The growing trend around conversions may help to revitalize downtown areas that have been affected by changing workstyles that result in less need for office space."
It's worth noting that markets experiencing higher-than-average conversion percentages typically have more older office buildings with higher vacancy rates. For example, Cleveland has the highest percentage of its office stock targeted for conversion (11% of total inventory). Boston has the largest footprint (sq. ft.) of conversions planned or underway at 6.1 million sq. ft., or 3% of its office inventory.
Looking ahead, CBRE is tracking 60 conversion projects scheduled to be completed in 2024, including 42 currently underway with another 18 in planning stages.
"Conversions offer one solution, but they will not resolve the challenges facing the office market on their own," said Julie Whelan, CBRE Global Head of Occupier Research. "Cities will need to be strategic in their approach to transform former office districts into mixed-use areas that are highly desirable to people and businesses."