- Developers converted more old buildings into rentals than ever before between 2020 and 2021.
- Developers are targeting a range of building types, from office buildings to churches.
- Increased work-from-home and hybrid opportunities is driving the trend.
Developers are converting old buildings into new apartments at an all-time high rate as work-from-home becomes permanent, according to a new report from RentCafe.
In total, developers created 28,000 new apartments out of old and under-utilized buildings between 2020 and 2021, the report said. That represents a 25% increase over the more than 22,300 apartments developers converted between the years of 2018 and 2019, prior to the pandemic.
The study analyzed conversions of buildings that include at least 50 apartments and used market data from RentCafe’s sister company, Yardi Matrix.
“Not all buildings are equally threatened by the work-from-home revolution,” Doug Ressler, a business intelligence manager at Yardi Matrix, said in a statement. “Larger office buildings in abandoned central business districts are better suited to conversion than the often-smaller office complexes distributed around the suburbs.”
These types of conversions — also known as adaptive reuse — became en vogue during the pandemic as interest rates and the price of construction materials increased. Now that the pandemic has entered its third winter, developers are eyeing residential conversions as a way to “resuscitate office buildings” and meet swelling demand for housing, according to the report.
Large cities such as Philadelphia, Cleveland, and Pittsburgh have been a hotbed for such conversion projects because they have a lot of old buildings and unused office spaces, the report adds. Altogether, developers converted more than 3,200 apartments in those cities, or 11% of the nationwide total, the report said.
Local governments have gotten behind the trend by creating incentives for conversion projects. For example, California Governor Gavin Newsom signed a pair of bills in late September that let developers bypass local regulations to build housing on commercial land under certain circumstances. Chicago city planners also introduced an initiative in September to convert vacant office spaces along LaSalle Street in the central business district into residential units.
“The residential market needs significantly more density in the areas of the largest cities, where the demand is greatest and where the tallest office buildings are located,” Ressler said.
Developers aren’t just targeting offices for conversions either as warehouses, hotels, and factories make up 37.3% of building types that developers target for conversion, according to the report.
Emily Hubbard, who cofounded Sage Investment Group, a real-estate investment firm that does multifamily renovations and conversions, told Insider in September that conversion projects are attractive because they can be completed quickly and are often less expensive than ground-up construction.
Sage recently spent $14.2 million to acquire an Econo Lodge and a Travel Lodge in Tacoma, Washington for conversion from extended-stay hotels into low-income housing, Hubbard said the two properties are expected to produce internal rates of return at nearly 40%, similar to other conversion projects in Sage’s portfolio.
The RentCafe report estimates that over 77,000 apartments are set to be completed after 2022 with hotels accounting for 22% of the total.
Hubbard adds that the need for housing across the country will also continue to spur demand for conversions.
“It’s on the forefront of everybody’s mind,” she said.