55K+ Offices Will Become Apartments in 2024

Plus: Office landlords resort to good, old-fashioned financial engineering to inflate property values.

55K+ Offices Will Become Apartments in 2024

Plus: Office landlords resort to good, old-fashioned financial engineering to inflate property values.

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Good morning. The number of office spaces converted into apartments in major U.S. cities has more than quadrupled over the last four years. Meanwhile, office landlords are using cash gifts, discounted loans, and other financial tactics to inflate property values.

Today’s issue is brought to you by CRED iQ — supercharge your CRE analytics with comprehensive CMBS data.

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*Data as of 1/23/2024 market close.

adaptive reuse

Over 55K Office Spaces Set for Conversion to Apartments in 2024

A transformation is reshaping urban skylines: office buildings are increasingly being converted into apartments. From a modest start of 12,100 conversions in 2021, the trend has escalated to a striking 55,300 scheduled for 2024.

A new era: A recent RentCafe report reveals a remarkable trend: over the past four years, the conversion of office spaces into apartments has quadrupled, nearly doubling each year. This shift reflects a growing desire to repurpose workspaces into residential units, echoing a change in how we view and use urban spaces.

By the numbers: Office-to-apartment conversions now account for 38% of the 147,000 apartments planned in future adaptive reuse projects. This marks a record since 2020, underlining a profound change in urban redevelopment. This surge is fueled by the upcoming maturity of $150 billion in office mortgages, sparking a rush to transform these spaces to meet the rising demand for residential units before the bill becomes due.

Fun fact: Interestingly, the office buildings selected for conversions are relatively younger, averaging 72 years old, which is 20 years younger than those converted earlier. This choice likely reflects a preference for buildings that require less refurbishment and align more closely with modern living standards.

Top converts: Washington, D.C. leads with 5,820 units transitioning from offices to apartments in 2023, an 88% increase from the previous year. New York City follows with notable projects like the transformation of New York's iconic Flatiron Building. Dallas-Fort Worth also identifies over 50 buildings, including downtown skyscrapers and suburban offices, for potential residential conversion.


Rethinking urban landscapes: In 2023, the U.S. saw its highest office vacancy rate at 19.6% in urban areas, the most since 1986 and 1991. This move to convert offices into homes marks a significant shift in urban design, catering to future housing needs. It also demonstrates the commercial real estate industry's agility in responding to crises and adapting to changing trends in asset preferences.


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✍️ Editor’s Picks

  • Foot off the gas: High interest rates and record home prices caused a 29% drop in investor purchases of single-family homes last year.

  • Georgia on my mind: ANiMAL, an Atlanta investment firm with a $200M war chest, has acquired properties in West Midtown and plans to target distressed assets across the Southeast.

  • Proptech purgatory: Proptech startups saw their fair share of failures in 4Q23, leading experts to debate whether more losers or winners will emerge in the near future.

  • Confidence soars: Builder confidence in newly built single-family homes shot up to 44 in January, up seven points, as mortgage rates fell below 7%.

  • European expansion: Blackstone (BX) eyes European real estate as U.S. opportunities are not viewed favorably by head honcho Schwarzman.


  • Flex living: Jamestown's Scout Living in Atlanta will offer 405 fully furnished apartments for flex rentals, targeting young professionals seeking mobility and local experiences.

  • Deals on the horizon: NYC multifamily had its worst year since the pandemic in 2023 with just $7B in apartment deals—down 52% from 2022.

  • Leveling the field: NY Governor Hochul proposed a sales tax on short-term rentals, aiming to generate $16M in annual revenue. Airbnb (ABNB) also supports the measure.

  • Funding the future: KDM Financial is launching a $350M fund to provide bridge loans for multifamily projects and distressed properties, targeting the Central and Southeast U.S.

🏭 Industrial

  • The Old West: LA's industrial market is seeing rising vacancies, more available space for sublease, fewer SF under construction, and negative absorption.

  • Storied success: Self storage remains a top performer in the commercial space with consistent demand and potential growth in certain markets nationwide.

  • Sweet success: HSA CRE signed a 447.215 KSF lease with HARIBO (yes, the candy company) at Bristol Highlands Commerce Center East in Wisconsin.

  • A+ Alanta: Atlanta Property Group acquired 100KSF of industrial with 94% occupancy in Norcross, GA, for an undisclosed price.


  • Twist of fate: Controversial developer Yair Levy sold a retail building in Downtown Miami for $27.5M, narrowly avoiding foreclosure.

  • Write it off: Thor Equities' buildings at 597 Fifth Ave and 3 East 48th Street are now valued at $84M, 53% below their 2014 valuation, and less than the $124M debt owed on them.

  • Gotta-get groceries: Publix Super Markets recently acquired a shopping center in Durham, NC, as part of its real estate expansion.


  • Back on the market: KPMG's current lease for 55 Second Street in San Francisco, covering eight floors, will expire at the end of the year.

  • Reimagined offices: About 90% of companies offered hybrid work arrangements last year, resulting in smaller office leases and a focus on communal spaces.

  • Snapping it all up: Snap (SNAP), parent company to Snapchat, signed a 10-year lease for over 400KSF in Santa Monica, one of the largest office deals in LA since the pandemic.


To Inflate Values, Office Landlords Offer Cash Gifts, Discounted Loans

To Inflate Building Values, Office Landlords Offer Cash Gifts, Discounted Loans

The exterior of 245 Park Ave. in Manhattan PHOTO: WSJ

In an effort to boost property values amidst a deep crisis in the office sector, landlords are increasingly using cash gifts, discounted loans, and other financial engineering tactics to boost rents.

What happened: Office landlords are resorting to concessions like cash gifts and reduced rent to keep annual rents and building profits high, ultimately inflating values. CBRE found the average free-rent periods on leases in high-end office buildings in major U.S. cities rose from 6.8 months in 2019 to 10.1 months in 2023. Cash payments to tenants for construction work also rose by 37% during the same period.

The problem: While legal, these underhanded tactics make publicly available property valuations somewhat unreliable. Brokers also point out the actual sales prices of buildings remained relatively unchanged despite surging vacancies and falling share prices of public office landlords since 2019, which indicates these tactics must be working.

Asterisk valuations: Analysts are having difficulty determining the office market's true state. For instance, SL Green Realty (SLG) recently sold a Manhattan office tower, 245 Park, at a $2B valuation—after offering a roughly 6% discount on the building's debt to the buyer, Mori Trust. Green Street estimates that high-end office building values have fallen 35% since the start of the pandemic.


Big picture: The use of concessions, side deals, and undisclosed transactions in the office sector led to inflated property valuations and limited transparency. While the worst of the crisis may be behind us, the true state of the office market is difficult to decipher due to this kind of financial engineering. But one thing’s for sure—someone’s getting ripped off. 


US commercial real estate is experiencing one of its largest price declines in over fifty years, according to the International Monetary Fund (IMF). This downturn, significantly more severe than previous ones during rate hike cycles, is attributed to recent aggressive monetary tightening and the shift towards remote work affecting office values.

Since March 2022, following the Federal Reserve's initial interest rate increase, property prices have fallen by over 11%, erasing the previous two years' gains. This decline is distinct in its severity compared to the relative stability or minor losses in past periods of tighter monetary policy. The current situation is similar to the notable downturns of 1983-1984 and 1988-1989.

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