15% of U.S. Office Space Shows Strong Potential for Residential Conversion, CommercialEdge Analysis Finds
As the commercial real estate sector grapples with structural shifts in space utilization, a recent market intelligence report from CommercialEdge, Yardi’s commercial research division, provides a systematic approach to evaluating office-to-residential conversion potential through their Conversion Feasibility Index (CFI). Led by Peter Kolaczynski, the analysis addresses the industry’s most pressing challenge: widespread office asset obsolescence risk.
The metrics tell a compelling story: within the nation’s 8-billion-square-foot office inventory, 7 billion square feet operate as investment properties, now facing record vacancy levels of 19.4%. This unprecedented dislocation in market fundamentals, combined with compressed valuations and looming debt maturities, has created both challenges and opportunities for institutional investors.
The institutionalization of hybrid work models has fundamentally altered space utilization patterns, with physical occupancy stabilizing around 55% nationally. However, this figure shows marked variation across submarkets, with prime locations like New York’s Plaza District and Bryant Park achieving occupancy rates of 80-90%, demonstrating the heightened importance of granular market analysis. As Kolaczynski notes with candidly, “Unless there’s an equally significant event, equal to COVID, that goes the other way and brings us back, I don’t see the tides changing.”
The evolution of institutional thinking about adaptive reuse has been equally dramatic. “The mentality was ‘that’s a lot of work, a lot of undetermined factors, it’s expensive, not interested,'” Kolaczynski recalls of the immediate post-pandemic period. However, this calculus has shifted markedly with the emergence of public sector incentives and the acceleration of value deterioration in certain assets. His team’s comprehensive analysis of 81,000 properties revealed that approximately 15% – representing 1.25 billion square feet – demonstrate viable conversion characteristics, significantly exceeding initial industry estimates.
This analysis framework encompasses three critical elements, each supported by sophisticated data analytics. The first examines physical plant characteristics: “Usually older buildings with smaller floor plates are better candidates,” Kolaczynski explains. The assessment includes detailed analysis of ceiling heights, mid-block positioning for light penetration, vertical circulation systems, and transit accessibility scores. Urban assets, particularly in markets like New York City, Chicago, and Washington, DC, have shown the highest potential for conversion when these physical attributes align with market fundamentals.
The second component evaluates capital stack considerations through Commercial Edge’s comprehensive tracking of nearly $900 billion in office debt. This analysis examines tenant credit quality, lease rollover exposure, and debt maturity profiles, with particular attention to properties facing near-term refinancing challenges in a compressed valuation environment. The platform’s integration of loan maturity data with property fundamentals enables investors to identify assets where conversion potential intersects with motivated disposition opportunities.
The third pillar assesses multifamily market fundamentals, incorporating absorption trends, rent growth projections, and supply pipeline analysis. This multi-factor approach has proven particularly valuable in urban cores where the intersection of office obsolescence and housing demand creates compelling conversion opportunities. Markets demonstrating strong multifamily fundamentals combined with challenged office assets have emerged as primary targets for conversion strategies.
Drawing parallels to retail’s e-commerce disruption, Kolaczynski envisions a bifurcated market evolution similar to the mall sector’s transformation. While trophy assets in prime locations maintain their position, secondary assets are finding highest and best use through various repositioning strategies. This includes an expanded role for flexible office solutions, which Kolaczynski views as critical in addressing distributed workforce demands, along with conversions to life science, multifamily, and data center uses.
The path forward will require increasingly sophisticated analysis of building characteristics, market fundamentals, and capital markets dynamics. Through Commercial Edge’s expanding suite of analytical tools and strategic partnerships with architectural firms, Kolaczynski’s team is enhancing their capability to evaluate adaptive reuse feasibility at scale. As municipalities expand incentive programs and creative capital solutions emerge, this data-driven approach is helping institutional investors and developers navigate this complex transformation. In an environment where challenges increasingly present themselves as opportunities, the ability to quantify and evaluate conversion potential has become an essential component of office sector strategy.
The full report is available at CommercialEdge’s Website.
