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From 'obsolete' to 'absolute'

Whitney explains that the COVID-19 pandemic accelerated an already existing trend of office-to- apartment conversions.

“The pandemic, and the resulting work-from-home moves, have really made some buildings that were kind of borderline obsolete, pretty much absolutes,” he said, adding that city leaders have been exploring ways to repurpose these unutilized spaces. He believes this trend will persist into the future, despite many employers calling workers back into the office.

In Chicago, office vacancies in the central business district at the end of the year reached an all-time high of 23.8%, according to Crain’s Chicago Business, citing data from commercial real estate CBRE Group. That figure is up from 21.4% at the end of 2022 and 13.8% at the beginning of the pandemic.

RentCafe also reports 2,822 office-to-apartment conversions in the pipeline for Chicago, which ranks fourth among metro areas in number of such planned conversions behind Washington, D.C., New York City, and Dallas.

Whitney says these conversion projects aren’t necessarily cheaper than starting from the ground up, but they can go to market faster than new constructions.

“The one asset you have in a project like this is you're keeping the building structure — and to a large extent, the building envelope,” he explained. Much of the existing infrastructure in an office building, such as elevators and stairs can be retained in a conversion project.

That said, developers still need to put new electrical, plumbing and HVAC systems in place, while considering window replacements, which add to the costs of an office building makeover.

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What does a converted office building look like?

Since the Millenium On LaSalle was originally constructed in 1902, its conversion was eligible for historic tax credits, which helped offset some of the costs — but it also included some unique features that the project developers decided to preserve, such as carved marble, intricate crown molding and 60-foot high ceilings on the second floor.

Whitney highlights that the building is situated on a corner lot and already featured large windows, which allowed for plenty of natural light — a crucial requirement for residential apartments.

There are other qualities that can break or make a conversion project as well, such as the size of the building floor. Whitney says a width of around 70 feet is ideal, although his firm has made buildings as wide as 125 feet work.

A 2023 report from Moody’s Analytics that examined office-to-residential conversion projects in New York City found successful ones typically involve older buildings with more relaxed zoning restrictions and are about 23% smaller in building footprint area, with post-conversion offered rents 15% higher on average than comparable non-conversion properties as well.

Whitney thinks these conversion projects typically take around two to two-and-a-half years to complete when factoring in time for design, permit acquisition and construction. But he adds that builders need to include some contingency and cushioning in their budgets in case of unforeseen issues with the original construction.

Is this an opportunity to ease the housing crisis?

Whitney believes these projects are a great opportunity to create more affordable and market-rate housing, but it can be a challenging environment for both conversions and new construction, since construction and borrowing costs are so high currently.

However, he’s also seen buildings in Chicago sell for incredibly low prices, which could give developers more breathing room to undertake an adaptive reuse project.

“I think the office market overall is in a period of resetting value. And with these reset values, I think there's going to be an appetite [for conversions].”

Still, some experts have doubts as to whether these makeovers can solve the housing crisis on their own.

“Office-to-residential conversions are not a panacea, but rather one tool in a much broader toolkit for downtown revitalization,” Brookings Metro researchers Tracy Hadden Loh, Egon Terplan and D.W. Rowlands wrote in a 2023 report for the public policy think tank.

The report maintains there’s still demand for office space, even with many companies shifting into hybrid models — and in some cities, new office construction is still taking place. Instead, the authors say, office buildings need to be managed more efficiently to accommodate this new dynamic nature of work, such as hot desking (allocating or rotating desks as needed) and lease sharing between businesses.

They also explain that the downtown core is often a very small slice of a city’s real estate pie. A more comprehensive solution to the housing shortage would be to add units in every neighborhood — not just one.

And then there are the costs of these conversion projects, which can often be too expensive to undertake unless there’s significant public funding or tax incentives. Whitney, who says the costs can range between $315 to $325 per square foot in Chicago, believes that making more subsidies available to developers can help move projects forward.

The researchers at Brookings point to Chicago’s La Salle Reimagined project, which selected five adaptive reuse proposals consisting of over 1,600 units of mixed-income housing on LaSalle Street, as a great example of funding for conversions. The project aims to repurpose almost 2.3 million square feet of vacant space, including the creation of over 600 affordable homes for residents earning an average 60% of the area median income.

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About the Author

Serah Louis

Serah Louis

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Serah Louis is a reporter with Moneywise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.

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