How office-to-multifamily conversions help solve the affordable housing crisis
The nation’s severe housing crisis has sent nearly every multifamily real estate developer on a journey to find creative solutions for increasing affordable housing inventory. As the entire real estate industry thinks outside the box, office building conversions have emerged as one of the most logical ways to create more affordable housing supply in the most impactful locations. But logical doesn’t mean simple — or inexpensive.
Office spaces offer many benefits to developers considering a conversion, but it is no simple task to take a typical office floorplate and make it functional for residential use. To succeed, the developer needs to select the right office building, compile a complex capital stack, and put an experienced team in place to ensure the space meets the needs of today’s residents.
Solving two problems at once: Equalizing oversupply of offices and undersupply of housing
The U.S. has too much office space and not enough housing units, particularly for low-income households. Office-to-residential conversion projects help to equalize the supply-demand imbalance in both asset classes.
According to the National Low-Income Housing Coalition, the nation is short 7.1 million rental homes for extremely low-income households. As a result, many low-to-moderate income families live in homes with a high rent burden, sometimes exceeding 50% of their total income.
The office sector, on the other hand, has the opposite problem. The national office vacancy rate is 19.9% according to Yardi data, up 170 basis points year-over-year. Some major cities are reporting a significantly higher share of vacant office spaces, including San Francisco (25%) and Austin (28%). More than 10% of all office transactions are in distress, and construction starts have fallen to just 2.6 million square feet in the first quarter of 2025. By reallocating the real estate to the higher and better use, the market fundamentals in both sectors will improve.
Location is important, but it’s not everything
Office buildings with stellar locations naturally support the future success of a residential project. Those offices that offer high walkability scores, direct access to essential amenities like restaurants and grocery stores, and easy access to public transportation are most suitable for conversion.
However, even with an abundance of available offices in strong locations, it’s clear that not every office space is conversion friendly. Offices tend to have large, expansive floorplates, often with limited bathroom areas per floor, and those are typically grouped near the building’s core. This configuration is fundamentally different than a multifamily layout requiring a kitchen and at least one bathroom in every unit, with multiple units per floor. The mechanical design of an office building, including HVAC and plumbing systems, is profoundly different as well. Often, all or most of these systems will need to be completely repositioned for a successful conversion project — a costly undertaking that will require an experienced development team.
Developers also will need to pursue zoning changes with the municipality. Most cities and suburbs are amenable to zoning changes due to the affordable housing shortage, however, a zoning change lengthens the timeline of the project and can delay permitting while the developer seeks approvals.
Compiling the complex capital stack with the help of an experienced team
Currently, only a small percentage of proposed projects make it through the financing and development process. According to Yardi Matrix data, in 2024, there were more than 55,000 proposed office-to-apartment converted units in the pipeline, but only 3,700 were completed during that calendar year. While developers are bullish on the projects in process, low delivery percentages show that many proposed projects are experiencing real-world challenges.
Putting the right capital stack together is critical to getting an office-conversion project over the finish line — and that means building a team of experienced professionals who understand the complexity of both the financing and the development aspects of the project. There will need to be enough capital in the deal to fund the construction, convert the plumbing and mechanical systems, and hold the property through zoning changes. Typically, that requires a multi-tiered capital stack that marries the financial complexity of an affordable housing deal with the operational complexity of a building conversion.
The financing team should be able to identify and secure a wide spectrum of capital sources, including grants, incentives, and tax credits that can help round out the equity investment in the deal and fully fund the project. An experienced team will not underestimate the unique process of adaptive reuse and affordable housing — and will be able to anticipate the unique needs of the project before and during construction.
Opportunities abound — for those who can handle the complexity
Office-to affordable-housing conversion projects are growing in popularity every day, despite the significant challenges developers will undoubtedly face. This year, the industry is set to hit a record number of office-to-residential conversion projects with 71,000 apartment units in the pipeline. That figure is up significantly from only 23,100 apartment units created from office space in 2022.
There are tremendous opportunities for those developers willing and able to take on the work and risk of a conversion. By working with a commercial real estate capital partner who understands the core fundamentals and challenges of financing and executing these deals, developers can take advantage of this tremendous opportunity.
To discuss the current housing market environment and what financing options are best for your next project, connect with Robert L. Likes directly, your KeyBank relationship manager, or find an expert.
This article is for general information purposes only and does not consider the specific investment objectives, financial situation, and particular needs of any individual person or entity.
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