A recently released report by NAIOP points to the conversion of outdated and underutilized office space into medical, life science and multifamily uses will be critical in the reduction of bloated office vacancy rates across the nation.

The report issued by the NAIOP Research Foundation states, “Although it is difficult to estimate the amount of office space that will become available as long-term leases expire in the years ahead, there will probably be an excess supply of office buildings in most markets.”

The “New Uses for Office Buildings: Life Science, Medical and Multifamily Conversions” report was authored by Emil Malizia, Ph.D., CRE, Research Professor of City and Regional Planning at the University of North Carolina-Chapel Hill and President of Malizia & Associates, LLC. 

The report notes that the prospect of increased office vacancies “is leading property owners and developers to actively seek alternative uses for these office properties. Strong demand exists for life science lab space, medical office space and rental apartments in many markets due in part to the continuing threat of new viruses, chronic health conditions, an aging population and migration to cities or from one area of the country to another.”

Thomas J. Bisacquino, president and CEO of NAIOP, added, “Use of office space has changed as the pandemic propelled remote work and hybrid schedules for traditional office workers. This leaves the potential for older and empty office space to be converted into uses that are in greater demand creating a best-case scenario for office owners and developers as well as the sectors that need space.”

The report reveals that converting an existing office building can offer several advantages over new construction:

•  Permits and other approvals are easier to obtain than for new construction. Life science and medical office uses are usually permitted by an office building’s current zoning. Conversion of an existing building to multifamily use in a commercial area will usually encounter less community opposition than new construction in a residential area.
  
  
• Conversions can be completed more quickly, and material and labor costs are lower than for new construction. These advantages are more pronounced when new construction would require demolishing an existing building, which can add substantial time and cost to a project.
  
  
• Conversion projects are more environmentally friendly than new construction. Conversion preserves the carbon that is embodied in an existing building’s structure, and less energy and fewer carbon-intensive building materials are needed than for most new construction.
  
  
•  In some cases, a building can be partially leased during the conversion. Tenants can lease and occupy floors that are not currently undergoing conversion. This additional income can lower project risk and increase returns.

The report notes that, “property conversions and reuse offer a viable way to meet market demand and mitigate greenhouse gas emissions.”

The NAIOP report predicts an increase of office property conversions going forward. 

“Fueled by readily available capital, conversions to life science lab space should continue to accelerate, potentially leading to oversupply. The primary constraints on supply are the expertise needed to execute conversion projects successfully and the stringent structural, systems, site and location requirements that must be met for the creation of marketable life science lab space,” the report states.

In particular, the need for more affordable housing absent new expensive construction projects is seen as a viable option for some owners.

“The continued use of office buildings for adaptive reuse multifamily projects is also likely to accelerate. Certainly, the 440 adaptive reuse projects of 50 units or more that are either proposed, planned/seeking entitlements or under construction reflect the sustained demand for multifamily rental properties. The excess demand for affordable rental units will continue even as governments provide subsidies to stimulate the production of new affordable units and the maintenance of existing ones. Furthermore, public support for office conversions to revitalize urban areas with residential adaptive reuse projects and other new development is growing,” the report concludes.

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