The nation’s housing crisis has reached a breaking point, pushing developers to rethink how and where new supply can be created. Among the most promising — and debated — solutions is the conversion of underutilized office buildings into much-needed affordable housing.
On the surface, the concept seems straightforward: repurpose empty office space into homes in locations where demand is highest. In practice, however, these projects are anything but simple.
Converting office buildings into livable, modern and affordable multifamily residences requires far more than reimagining floor plans. Success depends on choosing the right property, assembling a complex capital stack and deploying an experienced team capable of navigating regulatory, design and construction challenges.
Done right, these conversions not only add critical housing supply but also breathe new life into urban centers struggling with high office vacancies.
The Case for Conversions
The United States has too much office space and not enough housing units, particularly for low-income households. Office-to-residential conversion projects help to equalize the supply-demand imbalance in both asset classes.
According to the National Low-Income Housing Coalition, we are short 7.1 million rental homes for extremely low-income households. As a result, many low-to-moderate income families live in homes with a high rent burden, sometimes exceeding 50 percent of total income.
The office sector has the opposite problem. The national office vacancy rate was 18.7 percent as of August, down 80 basis points over the preceding 12 months, according to Yardi Matrix.
Some major cities are reporting a significantly higher share of vacant office spaces, including Seattle (27.2 percent) and Austin at (26.5 percent). More than 10 percent of all office transactions are in distress, and construction starts have fallen to just 2.6 million square feet in the first quarter of 2025.
By reallocating the real estate to the higher and better use, the market fundamentals in both sectors will improve.
Office buildings in prime locations offer a natural foundation for successful residential conversions. Properties with high walkability scores, close proximity to restaurants and grocery stores as well as easy access to public transit are the most promising candidates.
Yet even in strong locations, not every office building is suited for conversion. Most office properties feature large, deep floorplates with limited restrooms clustered near the building core, a stark contrast to multifamily layouts that require kitchens and bathrooms in each unit.
Also, mechanical systems such as HVAC and plumbing differ significantly and often need to be completely reconfigured, adding considerable cost and complexity to the project. An experienced development team is necessary to navigate these challenges effectively.
Beyond the physical hurdles, zoning is another key consideration. While many municipalities support rezoning because of the pressing need for affordable housing, the process can extend project timelines and delay permitting as approvals are secured.
Navigating the Capital Stack
Currently, only a small percentage of proposed projects make it through the financing and development process. In 2024, there were more than 55,000 proposed office-to-apartment converted units in the pipeline, but only 3,700 units were completed during that calendar year, according to Yardi Matrix.
While developers are bullish on the projects in process, low delivery percentages show that many proposed projects are experiencing real-world challenges.
Assembling the right capital stack is essential to completing an office-to-residential conversion, and it requires a team of seasoned professionals who can navigate the complexities of both financing and development.
Deals need enough capital to fund the construction, convert the plumbing and mechanical systems, and hold the property through zoning changes. Typically, that requires a multi-tiered capital stack that marries the financial complexity of an affordable housing deal with the operational complexity of a building conversion.
The financing team should be able to identify and secure a wide spectrum of capital sources, including grants, incentives and tax credits that can help round out the equity investment in the deal and fully fund the project.
Office-to affordable-housing conversion projects are growing in popularity every day, despite the significant challenges developers will undoubtedly face.
This year, the industry is set to hit a record number of office-to-residential conversion projects with 70,700 apartment units planned or in the pipeline, according to Yardi Matrix. That figure is up significantly from only 23,100 apartment units planned during calendar year 2022.
There are tremendous opportunities for those developers willing and able to take on the work and risk of a conversion. By working with a commercial real estate capital partner who understands the core fundamentals and challenges of financing and executing these deals, developers can take advantage of this tremendous opportunity.
Consider these factors when working with financing partners:
- Do they understand the office conversion sector, and have they successfully done deals that we can discuss?
- Do they have a complete and integrated capital stack offering?
- Do they have a clear understanding of my unique market situation?
- Is this a well-established lender that has survived economic ups and downs and consistently remains committed to the commercial and residential real estate industries?
- Where are they located? If you find an ideal financing provider, they can likely work successfully with you anywhere in the United States.
Business owners should be confident in asking their potential financing providers the tough questions to thoroughly assess and choose the right team.
Robert Likes is president with Cleveland-based KeyBank Community Development Lending & Investment, specializing in affordable housing.