In February 2023, I co-authored an article for TG discussing problems developers face when converting older office properties to residential uses, a process known as OTR conversions. We chose to target downtown Class A office buildings located in the five major Texas metros (Dallas and Fort Worth were examined separately) constructed during the 1980s, such as One American Center in Austin and Bank of America Plaza in Dallas.
That decade saw massive overbuilding due to the favorable tax incentives in place at the time. Most of those buildings are now more than 40 years old and not the most desirable spaces when compared to the new office buildings constructed in the last decade.
At the time the TG article was published, little OTR conversion activity had occurred in Texas. Although the number of conversions is still relatively small, activity has begun to pick up. This is partly due to the popularity of remote and hybrid work post-COVID-19, resulting in elevated office vacancies.
Yardi Matrix, a firm providing market intelligence tools to real estate professionals, reported that U.S. OTR conversions increased by 357 percent from 2021 to 2024, with about 55,000 conversions to residential units recorded. Estimates by Yardi Matrix and commercial real estate services company CBRE are forecasting that the level of future U.S. OTR conversions during the next decade will be somewhere between 1.2 and 1.38 billion-sf. That’s not an insignificant amount.
As you may have guessed, Washington D.C. and New York City lead the way in planned OTR conversions. Yardy Matrix numbers published in Multi-Housing News reveal a combined 11,035 planned residential conversions in those two cities alone. However, the Dallas metro ranked a distant third with 3,163 residential unit conversions in the pipeline. Dallas has emerged as the most popular Texas metro for OTR conversions so far.
These types of OTR projects are costly and complex due to the level of reconfiguration that must occur. As a result, some cities have chosen to offer subsidies to developers to boost the number of conversions. In Houston, the Downtown Living Initiative provides up to $15,000 per unit in tax rebates for residential development. Although there are some incentives being proposed in other Texas cities, they are not in place yet.
Some industry professionals are predicting a wave of office fire sales that could lead to increased OTR conversions of older, less attractive office properties. In an October 2024 Business Insider interview, Richard Barkham, chief global economist for CBRE, predicted that a wave of offices will be going back to banks in the next two to three years where they will be sold at a discount and either demolished or converted. Barkham believes that, with the ongoing housing shortage in the U.S. and declining demand for office space, OTR conversions could provide a lifeline for struggling real estate investors. I, for one, hope he’s right.
