Office-to-residential conversions have surged 357% since 2021 as billions in commercial mortgages come due
Office-to-residential conversions are up 357% since 2021, according to a report from ResiClub
There's $150 billion in office mortgages set to come due in 2024.
Conversions are gaining momentum amid a "wave of expired leases," ResiClub's cofounder told BI.
The pandemic made "work-from-home" a seemingly permanent part of our lives, but the ailing commercial real estate sector is trying to give new meaning to "live-at-work" as an increasing number of offices are converted into homes.
Since 2021, the number of office-to-residential conversions has skyrocketed 357%, according to a Monday report from ResiClub Analytics, which cited data from RentCafe. Three years ago, the US had 12,100 office-to-apartment units ready to be converted. That now stands at 55,300.
The commercial real estate sector continues to wade through uncharted territory as debt mounts and work-from-home trends appear to be a lasting legacy of COVID, all while the Federal Reserve has hiked borrowing costs at a historic pace.
Markets expect policymakers to ease interest rates sometime in 2024, but that might not bring much relief for office owners. A January report from Moody's said the national office vacancy rate hit a record 19.6% last quarter, roughly 280 basis points above pre-pandemic levels.
According to ResiClub, Washington DC, New York, and Dallas lead the way with the most office-to-apartment conversions planned.
"Nearly $150 billion of mortgages on U.S. office buildings are maturing by the end of 2024, and just over $300 billion of loans will mature by the end of 2026," a separate report from CommercialEdge said.
Owners of big office buildings are under pressure to refinance maturing mortgages at a time when vacancies are up and continuing to rise. Commentators have been warning for months of an apocalypse coming for office real estate as owners look to refinance debt at higher rates and lower property values.
Research group Capital Economics has forecasted that this year will bring the sector to its breaking point, and has predicted the full 20% peak-to-trough decline in values to be felt in 2024. Last year, about $541 billion of commercial real estate debt officially matured. The firm said the fallout proved muted as many loans were extended, though the strategy of "extended and pretend" cannot last forever.
By 2027, $2.2 trillion of commercial real estate debt is set to mature, Capital Economics said.
ResiClub cofounder Lance Lambert pointed out that commercial buildings aren't all designed or constructed to be repurposed as living spaces. Converting offices into residential units can be useful, yet they often cost more than building from the ground up.
Still, the trend is "gaining momentum," Lambert told Business Insider.
"It makes sense given the wave of expired leases and vacant office buildings," Lambert said. "Developers and cities just need time to figure out the economics of the model."
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