Offices Increasingly Being Converted to Apartments

A combination of low apartment vacancy rates and persistently high office vacancy rates is leading to a shift in the rental property game in cities around the country. From a front page article in today’s (5/7/14) Wall Street Journal:

Historically, office space has commanded substantially higher rent than residential space. But that is starting to change, especially for older buildings that have lots of architectural charm—often located in urban downtowns—but are no longer desirable as top-notch office space.

At the end of 2013, the U.S. apartment vacancy rate stood at 4.1%—the lowest since the end of the dot-com boom in the early 2000s, and below its 5.7% average rate since 1980, according to an analysis of 50 top markets by property-data firm Reis Inc. Meanwhile, the office vacancy rate was 16.7%—only a nudge down from the 17.6% post-economic crisis high reached in 2010 and well above its average of 14.9% since 1980.

That residential rents are surpassing office rents reflects the path of the U.S. economic recovery as well as demographic and lifestyle shifts. During a typical cycle, demand for office space picks up within a year or two after the recovery begins, allowing office landlords to fill their vacancies and charge higher rents.

Even in smaller markets like the Triad’s the highest occupancy rate is in downtown Winston-Salem – 97.2% – and that might help explain why developers are looking to convert the old Reynolds HQ building into a combination boutique hotel and luxury apartment development. Winston-Salem is also home to the Nissen Building, an historic office building that was converted to apartments years ago and has been 100% occupied for years.

This seems to be one more piece of data showing that a combination of demographic trends, from Millennials waiting longter to form households to America’s increasing urbanization, are having a profound effect on housing trends overall and the apartment industry in particular.