Office-to-residential conversion projects are taking American cities by storm, and it’s easy to see why. The number of people who work from home soared during the pandemic, and many companies are switching to hybrid or fully remote staffing models to attract and retain talent. With many cities—both large and small—offering incentives to encourage conversions, there’s enormous potential for developers to find lucrative opportunities while also revitalizing flagging urban economies.
But there’s another aspect of the office-to-residential trend that sometimes gets overlooked: converting business properties into homes and apartments is also an important opportunity to fight climate change and support cities’ environmental goals. By keeping climate goals in mind when developing residential conversion projects, in fact, it’s often possible to boost both the positive impact and the economic potential of a new conversion.
Let’s take a closer look at how developers can tap into this trend to serve their communities while also boosting their own bottom line.
A Win-Win-Win Approach
First things first: it’s important to recognize that real estate is a key driver of carbon emissions. In fact, as things stand, buildings account for about 29% of all U.S. greenhouse emissions, with more than half of that total coming from commercial real estate. That’s a problem, of course. But it’s also an opportunity. In fact, according to research published this summer by the National Bureau of Economic Research, between 10% and 15% of all American office spaces are suitable for environmentally friendly residential conversions.
Why is that a big deal? For starters, it should be clear to everyone that from an environmental standpoint, repurposing always beats demolition. Tearing down existing commercial properties to build new residential spaces from the ground up is lousy for the environment.
In fact, research shows that adaptive reuse produces up to 75% less carbon than new construction, and also offers important opportunities to introduce better insulation, energy efficiency, more sustainable materials, green spaces and other environmentally friendly options that benefit everyone.
The key to getting environmental benefits, of course, is to be smart about the kinds of projects you’re targeting for office-to-residential conversions. If an office building was built recently and is already LEED Platinum rated, there probably isn’t a whole lot to be gained from turning it into luxury apartments.
But that’s part of what makes residential conversions such a great idea—nobody wants to turn modern glass-and-steel offices into homes. Instead, developers are targeting older, pre-1990 construction for their conversion projects because these older buildings are typically smaller, a bit more architecturally charming and generally far better suited to residential conversions.
Not coincidentally, these older buildings are also by far the worst culprits when it comes to climate impact, so targeting these properties for efficiency-boosting, emissions-busting conversions is a smart way to reduce the overall climate impact from real estate.
It’s also a powerful way to improve the overall economics of office real estate. Compared to less environmentally friendly facilities, green office buildings have been shown to command higher per-square-foot rental prices, with lower vacancy rates and up to 21% higher market valuations. At a time when office rentals are seeing a flight to quality, maintaining greener office buildings while converting non-green facilities to residential is a smart move for property owners.
A New Layer of Incentives
Importantly, this kind of brown-to-green conversion project introduces a new element into the financial calculus for developers. Many areas are already offering preferential tax credits and other perks to developers that turn hollowed-out office blocks into high-value apartment buildings—but add environmental subsidies into the mix, and conversions get that much more attractive for everyone involved.
Last year, the Inflation Reduction Act set aside $369 billion to support projects that promote clean energy, sustainability and environmental justice. That certainly applies to eco-friendly residential conversions—in fact, some provisions explicitly set aside tax deductions and other benefits for commercial buildings that reduce their energy usage, or building owners that add energy efficiency upgrades to their properties.
As with any new law, the details remain a bit hazy, but with some clearer guidelines from the government it should be possible for developers to tap into important new funding lines and tax breaks, making it far more attractive to develop sustainable residential properties in cities that are currently starved of housing options.
Done right, such incentives can encourage not just environmentally responsible conversions, but also conversions that benefit local communities.
According to the NBER, in fact, a $40-per-square-foot subsidy to promote green conversions would almost entirely offset the cost of including affordable housing components in residential conversions. That could be a great way for cities to encourage these important projects, while making sure teachers, healthcare professionals and other working folks get access to high-quality housing in the communities they serve.
A Big Opportunity
America’s cities face big challenges, and office-to-residential conversions are a key part of many municipal leaders’ strategies for preventing a doom spiral of population decline and economic stagnation. But it’s important to look beyond the obvious benefits of creating much-needed housing in urban spaces, and also think about the way that such projects can drive knock-on benefits for neighborhoods, cities, and society as a whole.
The size of the opportunity shouldn’t be underestimated. It’s been calculated that targeted brown-to-green office conversions, focusing solely on the buildings most in need of an environmental upgrade, could yield about 400,000 new apartment units in America’s urban areas. Capitalizing on that opportunity would breathe new life into struggling cities while also helping to significantly reduce the carbon footprint of commercial buildings.
With the number of office-to-housing conversions soaring 43% over the past four years, these projects are going to happen one way or the other. So let’s make sure we’re targeting the right kinds of buildings—ones that let us maximize profits for our businesses while also optimizing for positive environmental impact in the communities we love.