When the coronavirus outbreak first erupted, employers were quick to shift their staff to remote work. In fact, some workers didn't so much as pack up their desks, thinking they'd be back to the office in a few weeks once everything blew over.
Fast-forward about 14 months, and a large number of office workers are still doing their jobs from home. For some, that's a good thing. For others, less so. And it's a mixed bag for employers as well. While some companies might prefer the convenience of having workers gathered under the same roof -- not to mention the uptick in productivity it might lead to -- it's hard to ignore the fact that dumping office space results in major cost savings.
The savings potential is so substantial, in fact, that even companies eager to bring workers back to the office are making plans to do so in a hybrid fashion. That way, they can limit the amount of square footage they need to rent and bank the difference.
In some markets -- notably, New York City -- the amount of unused office space out there is staggering. In fact, as of March 2021, 17% of Manhattan office buildings were vacant or soon to be. Not shockingly, office towers in Manhattan are now worth 25% less than they were a year ago. That's been hurting real estate investment trusts (REITs) with office buildings in their portfolios. And it's been making the people who invest in them very nervous.
Given that remote work may, to some degree, be around for the long haul, it begs the question of what to do with all of that unused office building space. And the answer may lie in converting it to apartments.
Could office buildings become residential?
In New York City, the concept of converting commercial space for residential use isn't all that foreign. Decades ago, prewar office buildings were commonly turned into apartments, especially in the city's financial district, which lost a lot of commercial tenants when investment banks and insurance companies moved their business uptown.
Now that New York City is looking at substantial office building vacancies, contemplating residential conversions isn't such a crazy idea. Still, there are challenges involved. For one thing, there's a cost to converting office buildings, and depending on the way they're structured in terms of elevator banks and lobbies, turning that space into apartments could entail a lot of work.
And then there are zoning laws to consider. Not only must commercial property owners get approved to convert their space to apartments, but they must also conform to building code standards.
For example, New York City apartments, as a general rule, need to have windows. But if a given office building has a large amount of space between its facade and its elevators, it could pose a challenge when converting that space to apartments -- namely, because developers would have to solve for the fact that much of that interior space would be windowless.
Still, converting empty offices to apartments isn't an impossible task. Not only has it already been done in older buildings, but it's also happened in the context of vacant malls. While there's a good chance office building occupancy rates will begin to pick up once things really improve with regard to the pandemic, demand for that space may never reach pre-pandemic levels. And that's a problem those building owners will need to solve one way or another.