Real Estate

Developers set their sights on converting underperforming office buildings into apartments

The incentives are there. It's what isn't visible that can drive up the costs.

By Robyn A. Friedman -- Globe Correspondent

July 11, 2024

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If you’ve been searching for an apartment in Greater Boston, then you know how competitive it can be. Asking rents are high — the median asking rent in metro Boston in June was $2,873, a 7.6 percent increase year over year, according to brokerage Redfin. Plus, there are few available apartments. According to apartment-listing site RentCafe.com, 94.9 percent of apartments in Greater Boston were occupied as of the fourth quarter of 2023, and there were eight prospective renters for every available apartment, often leading to bidding wars.

“There are more people looking for housing than there are available apartments,” said Van French, director of rentals for Gibson Sotheby’s International Realty in Boston. “It’s a difficult and frustrating cycle for renters to be in, even more so for lower-income renters who can’t afford a bidding war.”  

So, the opportunity to create new apartments, including affordable ones, by converting existing office buildings to residential, is piquing the interest of some developers.

“We were looking at the opportunities being created in the office market in early 2023 because we noticed the high vacancy in buildings we were touring,” said Adam Burns, founder of Boston Pinnacle Properties. “We define ourselves, traditionally, as multifamily ground-up developers, but with the cost of capital becoming an impediment, we were looking for other ways to create housing in a difficult environment.”

Burns is spearheading the first office-to-apartment conversion project approved under a recently extended pilot program the Boston Planning & Development Agency launched in October 2023. The program provides incentives to developers to convert office buildings to residential use. According to a press release announcing the extension, the program received nine applications to create a total of 412 apartments across 13 buildings  — projects that will convert 403,000 square feet of office space to apartments.

Office-to-apartment conversions are a win/win for all parties involved. Office-building owners benefit by being able to dispose of underperforming or vacant assets; multifamily developers can often pick up redevelopment opportunities at bargain rates — and with government incentives to help subsidize development costs; and the community benefits through the creation of new rental housing, some of which is affordable. Empty office buildings become homes, helping to revitalize entire neighborhoods.

Burns will be renovating the interior of an existing six-story building at 281 Franklin St., converting it to 15 apartments, three of which will be affordable. He said light construction and minimally invasive work in the basement will begin as early as later this month, with work to be fully underway in the fall. When complete, rents for the market-rate units will start at $3,200, he said.

Office-to-apartment conversions do not come without their challenges, however. According to Biria St. John, vice chairman at CBRE in Boston who co-leads the New England Multifamily Investment Sales team, zoning approvals take time, financing can be hard to secure, and the physical floor plates of older office buildings can be limiting. “Mid-block buildings that only have windows on the front and back rarely work, so a lot of these conversions are smaller buildings on a corner,” he said.

Plus, once construction begins on an older office building, developers can be met with surprises. “You have no idea what’s going to happen once you open up the walls,” said Caitlin Sugrue Walter, Ph.D., vice president, research of the National Multifamily Housing Council. “The unknown financial cost is a big downside to these transactions.”

That’s why the expected cost of an office-to-apartment conversion can vary from the original forecasts. “We have seen costs range wildly, from $150 per square foot to $400 per square foot or more,” Burns said. “The benefit of the adaptive reuse process is that there are components of an existing office building that can be reused, but to what level they can be reused heavily influences that cost of conversion. Other factors, like working with a building that does not have a suitable floor plate for residential conversion and trying to make it work will cause the costs to mount.”

Robyn A. Friedman has been writing about real estate and the home market for more than two decades. Follow her @robynafriedman. Send comments to [email protected]. Follow Address on Twitter @globehomes and sign up for our free newsletter at Boston.com/address-newsletter.