Office Conversions Gaining Momentum

When we first explored the movement toward converting underperforming office space into residential and other uses over a year and a half ago, the trend was in its early stages, with most reports citing high costs and incompatible structural designs as barriers to conversion. With vacancy rates continuing to rise despite return-to-office mandates, low multifamily vacancy rates—particularly in Southern California—and meaningful interest rate cuts unlikely in the foreseeable future, office conversions are gaining momentum.

According to a recent article in The Wall Street Journal, it’s also due to a convergence of additional factors: rapidly falling prices of obsolete office buildings, changes to zoning rules that allow for more residential construction, and government incentives that help bring down costs.

The Numbers

According to a report by CBRE, the U.S. office market is expected to experience a net decrease in office supply in 2025 for the first time in at least 25 years, with over 23 million square feet coming off the market. While 10.5 million square feet of that number represents the demolition of obsolete buildings, 12.8 million square feet will be converted to other uses, which outpaces the 12.7 million square feet of expected new office supply being built.

From 2018 to 2024, the U.S. averaged 58 office conversions annually. In 2024 alone, 94 conversion projects totaling 13.1 million square feet were completed. This year, there are approximately 68 conversions (planned or underway), a slight dip, but by 2027, an additional 263 are expected to be announced, according to the report. (As often happens with CRE data, there are other estimates regarding conversions. For instance, Yardi’s Commercial Café report estimates that over 149 million square feet of office space is proposed for conversion, 125 million of which have been proposed since the start of 2022.) One thing is certain, however, conversion proposals have grown steadily since 2018.

Nearly three-quarters (70%) of the conversions will be multifamily, with hotel, industrial, life science, and “other” uses making up the remainder. Since 2018, office-to-multifamily conversions have delivered over 28,500 housing units, with an additional 43,500 units expected if planned projects proceed.

Not Every Building is a Candidate for Residential Conversion

While declining office vacancy and a lack of affordable housing seem to be a match made in heaven, most buildings are unsuitable for residential conversion due to structural considerations. A number of studies gauge the percentage of buildings suitable for residential conversion, with most estimates in the 15% to 25% range. The Yardi Commercial Data and Research department recently developed a new tool, the Conversion Feasibility Index (CFI), that uses a weighted scoring system to evaluate the characteristics of buildings and determine their suitability for conversion. The CFI is a score assigned to each building based on various factors, including building age, location, total square footage, building depth, mid-block location, use type, number of stories, floor plate shape, ceiling height, green-building certifications, walkability, and transit accessibility.

Buildings’ scores are then categorized into three tiers: Tier I buildings are top candidates for conversion, Tier II buildings pose strong potential for conversion but may require some modifications or adjustments, and Tier III buildings will face significant challenges and limitations. More than 228.3 million square feet (2.7% of existing stock) of office space is classified as Tier I, with an additional 1 billion square feet (12.1% of stock) classified as Tier II. Most of the buildings are located within the cities’ CBDs. At the national level, more than 1.2 billion square feet of office space (or 14.8% of total office inventory) is considered suitable for conversion.

Southern California: High Office, Low Apartment Vacancies

While the office vacancy rates in markets that Voit services are mostly below the national average of Moody’s Analytics’ estimate of 20.6% (see Voit’s summary of Orange County and San Diego Q2 2025 office market reports here), the vacancy rates for some of the downtown submarkets are sky-high. San Diego’s overall vacancy rate is just over 14% but the downtown submarket is nearly 36%. Orange County has an overall vacancy rate of approximately 15.8%, while Los Angeles has a rate of 19.4%. On the multifamily side, the most current multifamily vacancy rates for Q2 2025 are approximately 5.2% for Los Angeles, 5.4% for San Diego, and 4.0% for Orange County.

Despite the somewhat low percentage of office buildings that can be converted into apartments, that still leaves a large number that can. According to the California Apartment Association, Los Angeles ranks third in the nation for future office-to-apartment conversions, with 4,388 units in the pipeline—an 80% increase from last year. Los Angeles also has significant potential for further conversions, with 83 million square feet of office space—roughly 25% of the metro’s total inventory—deemed suitable for residential redevelopment. One high-profile example is the transformation of ARCO Tower, a 33-story office building at 1055 Seventh Street, which is being redeveloped into apartments.

California State and Local Governments Providing Conversion Incentives

All across the country, state and local governments—hoping to revitalize their failing downtowns—are instituting programs in the form of tax incentives and zoning changes to incentivize developers to convert vacant office buildings to some other use. In 2022, the State of California lawmakers approved $400 million in incentives for commercial-to-residential conversions, including $105 million in grants to fund the conversion of commercial space into affordable and market-rate housing.

Additionally, Los Angeles is actively promoting the conversion of underperforming office space into residential and industrial uses. One tool is the modernization of its Adaptive Reuse Ordinance in January 2025. Previously, only buildings constructed before July 1, 1974, were eligible. This updated ordinance establishes a faster approval process for converting existing buildings and structures that are at least 15 years old into housing and expands adaptive reuse incentives citywide.

For some owners of obsolete California office properties, office-to-apartment conversions present new—albeit challenging—opportunities to adapt their properties to viable, income-generating assets, while helping the state meet its high demand for rental housing.