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The Pros and Cons of Office-to-Residential Repurposing
As the COVID pandemic continues, many companies are working to reduce their office footprints, and large swaths of commercial office space in urban centers remain unoccupied. To make up lost revenue, building owners are turning to repurposing—converting unused office space to residential. Although many factors limit how much this trend can scale, it does have significant revenue-generating potential while potentially supporting energy efficiency and housing access in high demand markets. Vendors of lighting, HVAC, security, and other systems used in building retrofits, particularly in midsize buildings, should take note.
Empty Urban Centers
Adaptive reuse is an idea that works well. Building owners recover revenue and inventory is added to urban markets with high housing demand. Brownfield construction (repurposing) is also generally more cost-effective than new construction due to savings on site acquisition and public reviews.
In practice, however, tax codes and zoning restrictions pose barriers. Repurposed apartments tend to be high end and building footprint sizes limit possibilities—for newer buildings, the distance from the elevators to the outer building edge, known as a lease span, can be too large and leave too much interior space without natural lighting for residential use. Even so, a record number of 20,100 apartment conversions occurred in the US in 2021, nearly double the 2020 figure. According to a recent report from rental listings site RentCafe, Washington, DC, is the nation’s leading market, with more than 1,091 new units converted.
The main value in the repurposing trend lies not in quantity but the quality of these conversions. Washington, DC, building stock tends to be old, with about 36% of units constructed before 1940 (versus about 13% nationally), according to the Brookings Institution. Repurposing projects are often most cost-effective with midsize, older buildings that are already in need of envelope and system upgrades to improve energy efficiency. The effect on urban centers may be large, as population density returns to urban cores, supporting the tax base and urban transport infrastructure.
Calgary, Alberta, is modeling this best practice—in response to an extremely high office vacancy rate, around 32% back in 2013, the city engaged an architectural firm to develop a building scorecard for reuse suitability based on building characteristics, and 35% of the city’s buildings penciled as potential conversions. Targeting 50% of this pool, Calgary also offered a per-square-foot incentive to developers and removed rezoning restrictions. Calgary’s downtown population increased by about 24% after this effort.
A Trend in Need of Support
As Calgary shows, city governments need to be actively engaged with the trend to make it work at scale. There is a long-term question about how the urban tax base may be affected by reduced commercial taxes. However, as demand for office space falls, cities need to respond and somewhat lower tax revenue from residential use is better than no revenue at all. Cities should partner with developers, energy efficiency specialists, and equipment manufacturers to ensure that these retrofits create the maximum reduction possible on urban energy intensity and support long-term sustainability goals. For more information on building energy efficiency, see the Guidehouse Insights Commercial and Residential HVAC report.