- Silverstein Properties has opened up a $1.5 billion fund to convert unwanted offices into housing.
- The move comes at a time when several major cities are grappling with high office vacancies in their downtown core.
That empty high-rise office building in your neighborhood may soon be turned into housing.
Silverstein Properties, one of America's largest commercial landlords, announced in the first week of December that it is raising more than $1.5 billion to convert unwanted office space into residential housing in markets ranging from New York to San Francisco.
Prior to the pandemic, office buildings were the lifeblood of central business districts across the country. Central offices were the reason that employees braved traffic congestion, hopped on public transportation, and bought their morning coffee and bagel at a local bakery. But in the two-plus years since the start of pandemic, office occupancy rates have not fully recovered as remote work continues to gut downtown areas.
For example, data from commercial real estate giant CBRE shows that about 25% of all New York's offices remain available for lease while other markets, like San Francisco and Boston, face similarly high vacancy rates. These figures are well-above their pre-pandemic averages and seem unlikely to change given the high demand for remote and hybrid work opportunities.
Silverstein's move also comes at a time when commercial real estate property values are declining. Data from Green Street, a commercial real estate market analysis firm, shows that commercial property values have declined by 13% over the past 12 months, which lowers the financial barrier to entry for developers who want to take on conversion projects.
Silverstein CEO Marty Burger told Bloomberg in a recent interview that these market conditions have created an estimated $10 billion opportunity to convert unwanted offices into new residential housing.
"Now is the perfect storm where office is not in favor, and the residential market is very hot," Burger said. "Hopefully we can acquire some of these office buildings that may be obsolete or may not be their highest and best use as an office building, and convert them to residential use, which the city desperately needs."
Such conversion projects — also described as adaptive reuse — became a go-to tactic for many residential developers during the pandemic as banks, hotel chains, and even some churches shed their real estate holdings in order to maintain stable financial footing.
According to a November study from RentCafe, developers created more than 28,000 apartments through conversion projects in 2021, an increase of 25% when compared to 2020. The same study estimates that roughly 77,000 new apartments will be added nationally via adaptive reuse conversions by the end of 2022. Should pandemic conditions linger and companies continue to allow employees to work from home, this figure could grow even more in the coming years.
Doug Ressler, a business intelligence manager at Yardi Matrix, which helped RentCafe compile the report, said that larger office buildings in central business districts and downtown areas are better suited for conversion projects because they're in dense areas with high demand for housing compared to buildings in more suburban markets.
And having already been down a similar path before, Silverstein Properties is positioning itself as a leader in the emerging market. The company converted an office at 116 John Street in New York's Financial District into a 416-unit market-rate apartment complex in 2021, rental listing site StreetEasy indicates.
Then in May 2022, Silverstein and Metro Loft acquired a 30-story tower at 55 Broad Street, also in the heart of New York's Financial District, for roughly $180 million and plans on turning the building into market-rate apartments, Commercial Observed reported in May.
Other developers, such as Emily Hubbard, co-founder of Sage Investment Group, which specializes in multifamily conversion projects, suggest that conversions are a cheaper alternative to building new homes from the ground up given that the cost of borrowing money and construction materials have both skyrocketed over the past two years.
Conversions can also be profitable, Hubbard said. Sage acquired Econo Lodge and a Travel Lodge in Tacoma, Washington for $14.2 million and plans to convert both buildings into apartments. Hubbard told Insider in September that Sage is expecting each building to produce a return rate of around 40%, similar to other conversion projects that Sage has completed.