What to do with outdated office, hotel and other commercial spaces? Many owners are turning these hard-to-lease spaces into apartments. And according to RentCafe’s first quarter Adaptive Reuse Report, this trend is only getting stronger.
It’s true that only the right commercial property is a good fit for an adaptive reuse. Location matters: Converting an outdated office building to apartments won’t work if that building sits in an undesirable location that renters don’t want.
Costs are important, too. If it costs too much to convert an old hotel or office space into apartment units, owners might instead consider leveling the entire property and starting from scratch.
Despite these challenges, RentCafe found that owners and developers are tackling adaptive reuse projects at an ever-greater pace.
RentCafe reported that conversions of existing commercial space resulted added more than 12,700 new apartment units throughout the country last year. That is an increase of 17.6% from 2022. It is, though, slower then the pace of conversions in prior years.
Chart provided by RentCafe. Source: RentCafe analysis of Yardi Matrix data.
These high numbers aren’t unexpected. Owners are struggling to lease space in outdated office buildings. And many older hotels have seen sluggish business since the start of the COVID-19 pandemic.
At the same time, the United States has a significant shortage of multifamily units. The demand for apartment units is simply far higher than the supply in many markets. If the numbers work, then, it makes sense to convert struggling commercial properties into new apartment units.
Hotel conversions led the way last year. RentCafe reported that hotel conversions brought 4,556 new apartment units to the country. That is an all-time high and accounted for 36% of all adaptive reuse conversions in 2023.
Office conversions were popular last year, too, not surprising considering the struggling state of this sector. According to RentCafe, developers created 3,587 new apartments last year from former offices. That is up 3.8% from 2022 and represented 28% of all conversions in the United States last year.
Peachtree Corners, Georgia, saw the most office conversions last year, adaptive reuse activity that resulted in 300 new apartment units. But certain Midwest markets saw plenty of conversion activity, too. RentCafe reported that Milwaukee and Indianapolis each saw more than 200 new apartments resulting from conversions last year.
What does the future hold for adaptive reuse projects? Yard Matrix numbers show that the pipeline of adaptive reuse projects is full, with 151,000 new apartment units now in various stages of the conversion process. Construction on 40,000 of these apartment units is already underway.
RentCafe said that 58,000 of these projects stem from office conversions.
Most of these future adaptive reuse projects are concentrated in big cities. RentCafe reported that Los Angeles has close to 6,000 new apartment units in its conversion pipeline. In the Midwest, Chicago has a little more than 4,000 apartment units in this pipeline.