Where We Worked, Where We Shopped, Where We Live

Welcome to the era of commercial-to-residential conversions, where shuttered offices and shopping centers find new life as apartments and condominiums. With remote work leaving offices empty and e-commerce reshaping the retail landscape, developers and investors are reimagining urban spaces and turning vacant properties into opportunities for housing.

This article explores key considerations for developers and investors to consider when exploring potential commercial-to-residential conversions.

Conversion Costs

Though repurposing vacant commercial buildings into residential spaces is an exciting opportunity, the cost of such conversions can be steep. In contrast to ground-up residential development, conversions come with unique unknowns: Will the building's layout permit sufficient rental units? Will construction uncover major issues such as asbestos or outdating wiring? What hurdles are existing in agreements that may impair the restructuring?

Commercial office buildings and shopping centers often feature layouts and infrastructure that are not naturally suited for living spaces. As a result, many conversions require major overhauls to the insulation, plumbing, electrical and HVAC systems to suit residential use.

Local and federal agencies are stepping in to help bridge the financing gap, particularly for projects including affordable or mixed-income housing. Washington, D.C.'s, Housing in Downtown Program, for example, is designed to incentivize developers to convert commercial buildings to multifamily residential buildings via a 20-year tax abatement. In Chicago, the city is offering $150 million in subsidies to convert four office buildings in its financial district into apartments and hotels, subject to the requirement that nearly one-third of the units are reserved for affordable housing. At the federal level, the White House released Commercial to Residential Conversions: A Guidebook to Available Federal Resources, a handbook that contains information on available federal programs, loans, grants, guarantees and tax incentives for commercial-to-residential conversions.

Another avenue developers and investors should consider to make these conversions financially viable is public-private partnerships. Such partnerships involve collaboration between city or state governments and private developers and often result in direct subsidies or grants, tax abatements or credits, expedited permitting and more zoning flexibility.

Zoning Restrictions

Zoning regulations pose another obstacle for converting commercial buildings into residential ones. In many cities, commercial districts are not zoned for residential use, requiring developers to secure rezonings and variances, which lengthen the time and expense for conversions. Moreover, even when conversions are technically permitted, outdated zoning codes may impose restrictive density limits, parking minimums or design standards that are incompatible with residential development.

On the bright side, there are some initiatives throughout the country aimed at alleviating this hurdle. For example, Champaign, Illinois, and Grand Rapids, Michigan, both amended their zoning codes to permit ground-floor residential use in certain business and commercial districts. Furthermore, New York City has a City of Yes for Housing Opportunity initiative and Midtown South Mixed-Use Plan, which have expanded zoning to encourage more office-to-residential conversions. Similarly, California has enacted statewide legislation easing zoning restrictions for adaptive reuse projects, particularly when affordable housing is included.

These reforms signal a growing recognition that zoning flexibility is essential to addressing housing shortages and revitalizing underutilized commercial areas. Yet, zoning reform remains uneven across the country, with many localities lagging behind in amending zoning codes to reflect the evolving housing and land use demands.

Community Impact

One of the most compelling aspects of commercial-to-residential conversions is the opportunity to add necessary housing without displacing existing communities. Because these buildings are typically empty or underutilized, projects avoid the potential negative consequences associated with demolition or gentrification, such as the loss of affordable housing or rising neighborhood rents.

In fact, these conversions can help bring low- and moderate-income residents back into city centers, where housing has become prohibitively expensive. Publicly funded conversions often include income-restricted units, helping create inclusive, mixed-income communities. Not to mention, revitalizing these buildings provides new foot traffic to local businesses and reinvigorates areas without displacing longtime residents.

In the future, suburban conversions are expected to gain traction, particularly in areas with aging malls, offering new potential for revitalization beyond the central business districts.

Converting office and retail properties into residential spaces is a promising, yet complex, process. Success depends on navigating high conversion costs, securing financing, overcoming zoning barriers and maximizing community benefits. With supportive public policies and innovative partnerships, these conversions provide an avenue to create more housing while reinvigorating underused commercial areas.

For assistance with commercial-to-residential conversions, please contact the authors of this article or other members of Holland & Knight's Commercial Real Estate Leasing Team.