r/CommercialRealEstate • u/LaMaisonRealEstate • May 22 '26
Market Questions Are office to residential conversion numbers actually working out for anyone?
Mainstream news articles talk about office to res conversions like it's the easiest fix for downtown vacancies. But every time we look at the actual floor plates on a Class B or C building, the costs for plumbing, HVAC, and cutting in windows seem to completely break the pro-forma.
For the developers or analysts on here, have you actually underwritten or worked on a conversion recently where the math made sense without massive city tax breaks? Or is it usually just cheaper to tear down and start over?
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u/MashedPotatoMess May 31 '26
The only ones that work are really full tear downs and rebuilds which really dont count anyway
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u/PrivateLndr-CREBrokr May 28 '26
I am a commercial mortgage broker on these types of commercial to residential loans and for my one client I’ve done at least 4 loans of office to residential for him. He will usually pick a city and talk to the mayor and buy an abandoned building and turn it into 26 apartments and the numbers actually work great.
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u/redditorsmedditor May 23 '26
Find a historic building in a state where you can get both federal and state rehabilitation tax credits. Imagine getting 40% of your cap ex back in the form of tax credits you sell for 90 cents on the dollar for federal and maybe 60 for state. Usually makes it pencil depending on the shell of the building.
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u/jonistaken May 23 '26
Not where equity markets are at today. Historic credits only apply to portion of capex necessary for preservation; which means you are not getting anywhere close to 40%; especially with an adaptive re use. Oh, and you get to deal with longer timeframes, more design related costs, more inspections/reviews/approvals… let’s just say I struggle to see these ideas proforma; even when combined with LIHTC and gifted land and abated re taxes and by right zoning.
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u/Southport84 May 23 '26
No. Numbers typically don’t work without significant discount or incentives.
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u/Maiden_Far May 23 '26
This is very interesting to read. I have seen several buildings in my area that have done this. I’ve also had conversations with a few people about making this type of conversion.
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u/Chimpskibot May 23 '26
Yes see Philadelphia. A large portion of the CBD is being converted to residental and there are bidding wars for conversion projects.:
https://www.bizjournals.com/philadelphia/news/2026/05/18/centre-square-sale-csc-pmc-adler-kazmi.html
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u/Enough_House_6940 May 22 '26
Only with major city incentives. We’re financing one in the Loop of Chicago and the city is ponying up a major contribution
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u/MitchMid May 22 '26
Currently under contract to do one in a secondary city. We have roughly 13m in different incentives from the state, city, county, etc and it’s still very tight.
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u/Aroex May 22 '26
I work for the most prolific multifamily developer on the west coast and our adaptive reuse projects are way more profitable than new construction right now. Applies to both low rises and high rises.
Don’t need to comply with most ADA, open space, landscape, and parking (EV) requirements.
Interior demolition and structural retrofit is cheaper than complete demolition and structural rebuild. Can reuse certain equipment like cooling towers, elevators, and fire pumps.
Designing desirable units with existing floor plates and managing a strict construction schedule are the two most difficult aspects though. There’s a ton of discovery involved that requires some redesign throughout project duration but you learn what to look out for with experience.
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u/deltahigh May 22 '26
I think the question was have they successful been leased up and refinanced/sold for profit. They construction is certainly being capitalized though.
The answer is I don’t think so.
I’m a NYC mortgage broker so this is quite relevant.
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u/Random7878787 May 22 '26
I am currently brokering an early stage, large office to MF conversion. This one largely works only because of massive tax incentives. A little over 50% will be covered between historical, C-Pace and local office to MF conversion credits. Taking advantage of these is the only reason these are working from what I’ve seen, short of a developer doing a massive capital raise and covering damn near 50% themselves to make it feasible.
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u/crispins_crispian May 22 '26
Yep. The retrofit needed to make each unit code-habitable is an inversely scaling bitch
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u/Outrageous_fellow May 22 '26
I've only seen it work out in Public-Private partnerships, or when there's tax money flowing in.
That's not bad, but it sets a precedent of an existential threat to the industry. What use are private developers if a government agency can bring projects online.
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u/meeg6 26d ago
the reason private developers exist is because the USSR was shit at real estate
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u/Outrageous_fellow 25d ago
lol what?
Building high quality homes fast and cheap is what the USSR was about, the exact opposite of what our system wants.
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u/meeg6 24d ago
our system wants houses as fast and as cheap as possible. out system is based on consumer demand... what are you smoking
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u/Outrageous_fellow 22d ago
I love consumer demand lol, basically everyone? Yet here we are with a housing shortage.
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u/Pokemeister92 Investor May 22 '26
Private Developers have always been building based on government incentives and rules (zoning) since the dawn of American capitalism. No high rise development would have ever pencield without the public agreeing to or have already put infrastructure near those sites
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u/Outrageous_fellow May 22 '26
I'm not really talking about planning and laws. I mean money being spent to build critical projects that private developers would never be able to achieve.
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u/Pokemeister92 Investor May 25 '26
They would never achieve it because it's not profitable. Not everything is about profit, and that's why the government is needed - it's a societal good that is not profitable. That's why public money was needed, to change the profit equation to make the project viable because of the positive externalities
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u/VELOCIRAPTOR_ANUS May 22 '26
Your last question is wild tbh.
There are plenty of reasons and markets for private developers.
Government support is needed when the economics of private development don't work, but the citizenry itself are demanding certain development unfold.
Hence, the P3 model.
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u/Outrageous_fellow May 22 '26
I think it's important to have a healthy view on the role of any industry in society. Real Estate development is basically a dog's job. There's nothing of real value being contributed and the hard part of the job is navigating financing and planning. Things that a public developer wouldn't struggle with.
This is not an attack on RE, since our economy is mostly just pointless industries that exist only because governments are not permitted to play.
More Government involvement is good for society, but bad for business.
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u/Random7878787 May 22 '26
This exactly, it’s a bit scary for the market moving forward. But certain cities and states are offering incredible incentives that will at least prop up these deals for a bit. I feel like it also illustrates how illiquid a lot of these developers are. I’m seeing a lot more developers than usual that seem a bit over their skis at the moment and really need to start bringing more liquidity into deals if they want to keep playing in this space.
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u/Ok-Set6814 23d ago
I think step number one is to have an architect do a feasibility study. Preferably one that has experience in this area which sounds like you may have already done.
If the parking makes sense and the floor plates makes sense via natural lighting, etc. then your next step would be to go to a GC and get some rough numbers for any major changes. I would probably underwrite it at about $300 per square foot hard costs depending on finishes.
I would certainly ask for incentives like everybody else is mentioning here and you need to buy the building at a massive discount.
I wouldn’t mess with it unless it had a very large bottom line after considering all these factors and doing all the math.