As the Washington DC Metro area and other major cities struggle with housing shortages, commercial real estate is facing record-high vacancy rates. DC has more than 22 million square feet of vacant office space, and as more companies allow employees to work remotely, or have reduced “in-office requirements”, Mayor Bowser is not expecting our downtown to regain its pre-pandemic vibrancy.

An obvious solution would be to convert these offices into residential buildings. In fact, Mayor Bowser is offering developers tax incentives to do just that. Not only would this solution add much-needed housing inventory, but it could revitalize a stagnant downtown. There are several complications, however.

Not All Office Buildings are Suitable as Residential Space
Most office buildings have deep floor plans and are sandwiched between other buildings. With windows on only two sides and cavernous interior spaces, most offices do not offer natural light for residential living.

Conversions are Expensive
Even if a building is suitable in size and shape, commercial layouts are very different from residential ones. Offices generally have a central elevator and limited bathrooms on each floor. The cost of installing additional elevators, and adding venting, plumbing, and sewage lines for each living unit is expensive. Conversions costs are estimated to be $100-$200 a square foot for an average apartment building.

Can You Make a Profit?
In 2021 Moody’s Analytics studied the feasibility of office conversions in New York City. This year was strong in residential rentals and weak in commercial space. The median apartment building traded at $434 per square foot (SF), while median office transaction was $542/SF. In addition to the $100-$200 conversions costs, $150/SF is needed for hard and soft costs, and with a 15% profit margin of $23/SF, office space would need to sell at $262/SF for a conversion to be a feasible investment. Only 20% of office buildings traded at $262/SF or lower in NYC in 2021. While the real estate market in DC is not the same as NY, making the numbers work is a challenge.

Even with these considerations, DC has seen several successful office conversions, and 2.5 million SF of office space is dedicated to conversion projects. While this will not solve our housing shortage, it is helping the area get closer to its housing goals.

This is a challenging market. With limited inventory and higher mortgage rates, it can be difficult to find a home that meets your needs and budget. As experts in the field, we can help you meet your goals.