Houston is experiencing significant growth in office space conversions, with 6.7 million square feet planned or underway, marking it as the city with the third-highest amount of such projects in the country.
This shift aims to alleviate the city’s high office vacancy rates as the pace of conversions and demolitions surpasses that of new office construction.
According to CBRE, a notable trend has emerged nationwide, where underutilized office buildings are increasingly being transformed into multifamily units or other commercial uses, coinciding with a notable decline in new office projects.
This year, the U.S. is expected to see a net loss in office space, a first in over 25 years, as new deliveries fall short of conversions.
Jessica Morin, Director of U.S. Office Research at CBRE, attributes this downturn to market trends favoring multifamily developments, coupled with exceptionally high office vacancy rates.
Specifically, Houston reported a 25.9% office availability rate in the second quarter of the year, highlighting the ample opportunity for office-to-residential conversions.
“The opportunity there is pretty apparent, especially with multifamily vacancy rates being significantly lower and showing double-digit rent growth since the pandemic,” Morin explained.
The diminished appeal of new office constructions is also evident.
Historically, the U.S. has delivered an average of 44 million square feet of new office space annually over the past decade.
However, this year, only 13 million square feet is anticipated, with projections suggesting that next year’s figures could be cut by half.
In parallel to these trends, the nation has seen a steady increase in office conversions, with an average of 58 conversions completed annually from 2018 to 2024.
In a record-setting year for 2024, 94 conversions were completed, and 68 more are expected to follow this year.
Houston is actively participating in this trend, with only 630,000 square feet of new office construction currently in progress.
This figure represents a mere 3.2% of the total office market in the city, dwarfed by the 6.7 million square feet slated for conversion.
Currently, two office buildings in Houston are actively undergoing conversion, while another eight have been announced or planned.
Among these, six are expected to transition into multifamily living spaces.
One prominent project is the redevelopment of the former Fluor campus in Sugar Land, which encompasses 1.1 million square feet of office space.
After relocating to a smaller, 308,000 square foot space in Houston’s Energy Corridor in 2023, Fluor Corp.’s former workplace has become a focus for redevelopment.
The Sugar Land City Council has established a redevelopment district covering the 53-acre campus, approving up to $24.3 million in incentives for the creation of parks, civic spaces, and public infrastructure in conjunction with environmental remediation.
Lovett Group, based in Houston, will spearhead the project, which is set to include around 720 multifamily units under the name Lake Pointe Green.
Cities nationwide are seeking to facilitate these office-to-residential conversions by relaxing regulations and offering incentives.
This approach not only addresses housing shortages but also boosts tax revenues by elevating the value of underutilized buildings.
Morin remarked on the role of municipal incentives in enhancing the prospects for future office conversions, stating, “It’s not in a city’s interest to have an empty office building.
Conversions can also improve local aesthetics and perceptions of safety in neighborhoods.”
However, challenges such as rising construction costs, tariffs, decreased availability of labor, and persistent interest rates threaten to impede these conversion efforts.
Factors such as the age and layout of buildings also contribute to the difficulty of such projects.
As a result, the option of demolition is becoming more prevalent for underutilized office spaces.
CBRE reports that 10.5 million square feet of office space is scheduled for demolition this year, marking a milestone where annual demolitions have exceeded 10 million square feet for the first time in eight years.
Morin stated, “Things that are working for conversions and things that might be working against conversions are all taking place at the same time.”
Despite these challenges, other signs like four consecutive quarters of positive absorption nationally indicate a gradual improvement in the office market.
CBRE estimates that by the end of this year, 23.3 million square feet of office space across the country will undergo demolition or conversion, suggesting a robust future pipeline for these projects.
With cities highly invested in the success of these initiatives, Morin concludes, “We’re going to see more and more programs that either make these projects easier or help alleviate the cost at the same time.”
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