As office vacancy rates rise in major US cities, and as residential real estate continues to be in short supply, the solution might seem obvious: turn office buildings into multifamily residences.
But even in this imbalanced market, there are large physical and financial hurdles to such conversions. Before the pandemic, only about 0.4% of office space was converted into multifamily units per year, and that figure has risen to 0.5% in 2023, Goldman Sachs Research economist Elsie Peng and analyst Vinay Viswanathan write in the team’s report.
“If you look at engineering reports and case studies, you see that converting large office buildings into smaller residential units is expensive,” Peng says. “You need to make a lot of adjustments, and the adjustment cost is very high.” If US cities are looking to solve their housing shortages through office conversion, government subsidies will be needed to make that feasible.
Goldman Sachs Research estimates that the annual conversion rate from office to multifamily will remain low and only increase to 0.6% in 2026, and to 0.7% in 2028. The conversion will create just 20,000 additional units for the multifamily market per year, a small amount compared to the 468,000 multifamily units that were built in 2023.
Too many offices, too few homes
The major post-pandemic trend in real estate is the rising vacancy rates in office buildings, as part of a shift to remote work. The office vacancy rate is 13.5%, the highest since 2000. “We expect it to rise even more in the next decade, because right now, a lot of office tenants are still locked into their contracts,” says Peng. “Their lower demand hasn’t been fully reflected in the vacancy rate yet. As their leases expire, the vacancy rates will rise.”
The increase in vacancies has led to office buildings across the US being rendered “nonviable.” Our analysts define this as a building that is more than 30 years old, that has seen no renovations since 2000, and that has a vacancy rate higher than 30%. Roughly 4% of offices in the US fit those criteria.
