“A few years ago, we did some research with the National Apartment Association and found that we’ll need to build 4.6 million apartments by 2030 in order to keep up with demand. And because construction costs are so high, there’s a variety of things that need to be done in order to get some more units built.” 

That’s Caitlin Sugrue Walter, VP of research at the National Multifamily Housing Council (NMHC), speaking with Connect CRE at NMHC’s recent Annual Meeting in Las Vegas in early February. In the video below, she previews a report the council’s Research Foundation prepared in partnership with the Urban Land Institute’s Center for Real Estate Economics and Capital Markets on one of the most common approaches to bolstering multifamily supply: conversions of existing properties. 

The report – Behind the Facade: The Feasibility of Converting Commercial Real Estate to Multifamily – is based on interviews with the developers of nearly 30 commercial-to-residential conversion projects across the U.S. It delves into the nuts and bolts of repurposing office, retail, hotel and industrial properties into housing. 

“Conversions have existed for decades, but the pandemic has accelerated their growth potential by rendering more commercial properties obsolete,” said Anita Kramer, SVP of the ULI Center for Real Estate Economics and Capital Markets and one of the report’s authors. “Our research demonstrates that there’s no ‘cookie-cutter’ formula for executing a successful project. But we do hope the insights that experienced developers shared with us can provide valuable guidance to newcomers in this expanding market.” 

As the report notes, “The universe of these obsolete buildings is large and growing—at least on the margin. And changes at the margin can have huge impacts on the use of real estate.  

“A segment of older, class B/C office buildings is becoming functionally obsolete since overall demand for office space is anticipated to grow more slowly post-pandemic than in the past and be more focused on newer stock,” according to the report. “In fact, JLL Research found that between the onset of the pandemic and the second quarter of 2022, buildings delivered in 2015 or later had 86.8 million square feet of net absorption, while pre-2015 buildings had net negative absorption of 246.5 million square feet. Almost 80% of the negative net absorption was in buildings delivered in 1980 and earlier.” 

At NMHC’s annual meeting, Walter provided Connect CRE with a preview of the report’s key themes, including the hurdles that need to be overcome in converting commercial properties to residential.

“‘The biggest challenge is that there’s a lot of unknowns when you’re using an existing floor plate,” she says in the video. “You don’t know what’s going on with the building. If it’s historic, there may be some remediation that needs to be done. If it’s an office property, typically there’s not a lot of windows and you need windows for residential.” 

Helping developers get over the speed bumps is among the intentions of the ULI/NMHC report. “This research helps housing providers and policymakers better understand when these conversions make sense,” Walter said in a statement accompanying the report’s release in late February. “NMHC supports enacting federal tax incentives to greatly expand the universe of properties where these conversions are financially viable and could add much-needed new housing.” 

Pictured: The Foundry in Alexandria, VA, one of the residential conversions ULI and NMHC profile in the report.