Office Conversions: Perspectives from Washington, D.C.

With several office-to-residential conversion projects underway and more planned, Washington, D.C., is one of the top U.S. locations for conversion activity. A confluence of factors is driving this activity: Broadly, the supply of office space continues to exceed demand, while housing is in shorter supply. Some office buildings are well located and readily reconfigured for alternate use. To spur change, several local governments are incentivizing adaptive reuse. Where these conditions come together, conversion projects benefit owners, occupants and other stakeholders.

This viewpoint discusses market factors behind the recent rise of conversion projects, presents a range of examples from the Washington, D.C., region which highlight the broad potential for conversion, and evaluates conditions which may impact the future pipeline of conversions.

Figure 1: U.S. Office Conversions by Construction Status & Estimated Year of Completion

The economic environment in the D.C. metro is broadly consistent with other areas in the U.S. In some respects, conditions in Washington are creating even greater opportunities for adaptive reuse projects than elsewhere.

Office Supply and Demand

Overall demand for office space remains muted in the Washington D.C. metro as office users continue to adapt to hybrid work, and economic uncertainty affects near-term decision-making. Employment in most key office-using industries remains down from pre-pandemic levels in the District, according to data from the U.S. Bureau of Labor Statistics. Return-to-office rates remain about 40% below pre-pandemic levels, according to Placer.ai. Law firms, a key demand driver for the District, have contracted, shedding administrative functions and, in a flight-to-quality, moved to more efficient buildings. In combination, these factors have contributed to a rise in office vacancy rates, with all three D.C. Metro markets hovering at historic high vacancy rates. Washington, D.C., stands at 22.4% vacancy, about double the historic norm.

Within the region, office vacancy varies by submarket and by building class. Historically, locations with better amenities and vibrant mixed-use developments have performed better. Today is no different. While the commercial office market remains challenged, high-quality buildings are healthy. The trophy1 office vacancy rate is 12.9%, almost half that of the overall market and returning to the historic norm. Most of the regional improvement in mobility and visitation (Figure 2) emanates from the City Center.

Figure 2: U.S. Office Conversions by Construction Status & Estimated Year of Completion

With private sector demand overwhelmingly shifting to the top 20% of buildings, vacancy is concentrated in commodity Class A, Class B and Class C properties. Seventy-eight buildings in the region (12% of total buildings) have a vacancy rate of 50% or higher. Nearly all of these are commodity Class A, Class B and Class C. A perfect storm of high vacancy, historic-high concessions, the cost of financing and the timing of loan maturities have caused an increase in commercial real estate distress. At least 12 assets foreclosed in the first half of 2024, double the total in all of 2023.

These market factors combine with physical characteristics, like floor-plate size and building core, for properties falling out of favor with demand, yielding an increase in buildings that are candidates for adaptive reuse. Further, the D.C. region’s vibrancy index is relatively stable and may benefit from lower interest rates, which could add further impetus for adaptive reuse projects.

Residential Supply and Demand

Washington, D.C.’s need for housing remains strong. Population growth has increased demand for housing while high interest rates have pushed would-be homeowners into multifamily housing. Rent growth remains positive and above national averages, a trend that CBRE expects to continue over the near term. A drop in expected deliveries in 2025-2026 may support further strength in the multifamily market, while the payment premium for ownership will keep many households in the rental market for longer. In the last decade, millennials and baby boomers led the urban population to grow more quickly than in the suburbs. Nevertheless, suburban housing completions remain strong and have grown particularly since the pandemic.

Importantly, people in different life stages often have different priorities. The newest entries to the workforce tend to favor more vibrant urban locations, while growing families appreciate the larger footprints and access to schools in suburbs. Many empty nesters return to urban locales, while others seek the tailored amenities of senior housing. Each of these demand factors can be satisfied through office conversion, as highlighted in the project typologies shown below.

Incentives and Benefits

In Washington, as in several other regions, local governments recognize the multiple benefits of office conversions. These projects boost the vibrancy of locations that have reduced office-occupancy levels and deliver much-needed housing close to job centers. To spur projects, governments have established economic incentives to support conversion of office buildings to residential or other uses.

In early 2024, Washington, D.C., established a goal to add 15,000 residents downtown. To catalyze this residential growth, the Housing in Downtown program provides a 20-year tax abatement for eligible projects. This significant incentive will support conversion projects that otherwise may not be economically viable. In addition to local tax and zoning incentives, projects can receive a variety of federal grants, financing programs and tax credits. Some programs are targeted specifically to conversion, while others are focused on sustainability, transit-oriented development, or historic preservation.

Challenges

Residential conversions in the District come with a distinct set of challenges that must be carefully evaluated before execution. For example, existing structures within Washington, D.C., must contend with the Height of Buildings Act of 1910. This federal law establishes a maximum commercial building height of 130 feet to preserve the distinct horizonal skyline in the District. Challenges arise when developers must confront an older building’s deep floor plates, which have an adverse effect on natural light and conversion potential. Typically, developers will counteract this challenge by constructing necessary light wells, which is expensive and can potentially reduce the size and value of the building. Alternatively, vertical construction can be less costly, but height restrictions in D.C. eliminate that possibility and can create further headwinds to conversions.

Lastly, D.C.’s Tenant Opportunity to Purchase Act (TOPA) maintains that property owners selling or demolishing an occupied residential building must first offer the building to a registered tenant association at the appraised value or a reasonable market value. Significant delays in the closing timeline can occur, however, causing buyers to make more conservative financial assumptions due to the volatility in extended closing dates. This also challenges investors’ ability to dispose of a property and has deterred potential buyers from the D.C. market as financial returns may not be realized. Interestingly, the recently announced Downtown D.C. Action Plan has proposed a 10-year exemption from TOPA within the Golden Triangle Business Improvement District (BID) and Downtown D.C. BID, adding further impetus to conversions.

While each conversion is unique, a few defining characteristics—including micro market conditions, site configuration and building typology—underlie each project. Each of these elements is important to a project’s viability. Often these characteristics are observed in recurring combinations, from which representative models of conversion opportunity can be drawn. In this section, we explore three examples from the nation’s capital that each represent a typology found across many markets. We call these the Cityscape Conversion, the Suburban Adaptation and the Campus Reinvention.

Figure 3: Washington Submarkets and Case Study Locations

Cityscape Conversion

Buildings near a city’s Central Business District (CBD) often have strong conversion potential for a multitude of reasons. Ideal residential characteristics include walkability; access to transportation; and proximity to restaurants, education and childcare. An example that leverages these strengths is the former headquarters of the Peace Corps, recently converted to an apartment complex named Elle. The 1960s-era mid-rise building is centrally located between Washington’s powerful K Street office corridor and the residential and retail districts of Dupont Circle and the West End. The site is advantaged by its location on a corner lot and relatively small 23,000-sq.-ft. floorplate. Opened in July 2024, the project offers 163 units across eight floors, coupled with luxury amenities such as a ground-floor restaurant, rooftop pool and fitness center.

Locations adjacent to the CBD have an opportunity to capture untapped demand. Elle is uniquely located in a 44-block area that currently has fewer than 40 residential units. The supply-and-demand imbalance, and the lack of competitive supply, can be an important project driver, especially where office demand is weak. In this case, the new supply is likely to serve as a central node in a developing live-work-play environment.

Downtown D.C. has only 13% residential use on a square footage basis, presenting a bright opportunity for rebalancing. The potential for converting obsolete real estate is clear as the future of the city evolves and new working patterns are established. Cityscape Conversions can be excellent targets that involve mid-size buildings in vibrant mixed-use locations with proximity to both traditional office districts and lower density residential and retail areas.

Figure 4: Cityscape Conversion—Typical Characteristics

Suburban Adaptation

Conversion projects are not limited to downtown locations. Northern Virginia has seen incredible growth in recent decades, fueled by higher density housing in the inner suburbs. Reflecting that trend is the conversion of the Park Center office complex in the western part of Alexandria, originally built in the 1980s. Two of the buildings were converted in 2022 to a 435-unit apartment community now known as Park + Ford. The third building is targeted to start conversion in 2025.

The Park + Ford towers have optimally sized floor plates of 16,000 sq. ft., allowing for logical apartment layouts and good natural light. A larger floor-to-floor dimension allowed the development team to maintain 10-foot ceilings in some areas, a marked improvement over the typical eight feet in residential new construction. Below the site are 1,380 parking spaces, allowing much of the ground level to remain landscaped.

Location and demographics also play a pivotal role. Situated along a major commuter route, Park + Ford benefits from a growing base of walkable retail and other amenities. The site has ready access to major employment centers including the Pentagon, Amazon’s HQ2 and downtown Washington D.C. These characteristics help determine target demographics, such as maturing millennial professionals seeking a walkable, magnetized location and larger apartments than those typically found near the city center.

Many suburban properties from the 1980s and earlier are no longer well suited to office tenants. However, as neighborhoods evolve, many buildings may find new life as Suburban Adaptations, which are marked by compact floorplans, landscaped setbacks from the street and good access to commercial and retail areas.

Figure 5: Suburban Adaptation—Typical Characteristics

Campus Reinvention

At the large end of the scale, even a major single-tenant corporate campus can be reinvented as a residential complex. The 33-acre former headquarters of Marriott International in North Bethesda provided one such opportunity. Erickson Senior Living is transforming the site into The Grandview, a senior living community comprised of 1,500 apartment homes and amenity spaces, including a fitness center, pool and restaurants. In addition to the on-site medical center, The Grandview will offer residents a full continuum of health care for seniors. While most of the project will be new construction, the adaptive reuse of one structure was an important element in the developer’s planning board application.

Demographics are driving a surge in senior living. CBRE Research finds that roughly 10,000 people reach age 65 every day in the U.S. The senior housing resident profile, aged 80 and up, is growing at a rate of four times the average population growth and is expected to continue for the next two decades. National rent growth of 7%–12% annually the past two years is indicative of the strong demand.

A full 30% of Fortune 500 firms relocated or took other major action on their headquarters in recent years, according to CBRE Americas Consulting analysis. As major corporations right-size their portfolios, several have exited the iconic headquarters campuses popular in the 1970s. These large sites, typically located in outer suburbs, can present an interesting opportunity for reinvention. Senior housing is a good fit for these properties, when residents value a serene location more than proximity to the city center.

Figure 6: Campus Reinvention—Typical Characteristics

What does this mean for owners/investors?

In this section we highlight three important considerations for adaptive reuse projects: Correctable vs. non-correctable use types, floor-plate-width analysis and conversion benefits and savings. These serve as a starting point for any project evaluation.

Correctable vs. Non-Correctable Use Types

Figure 7: Office-to-Residential Conversions: Correctable vs. Non-Correctable

Floor-Plate-Width Analysis

An ideal multifamily unit is 30'-35' deep with a 5'-wide corridor between units. All multifamily units are required to have windows. Mid-block office buildings often have dead walls (walls without windows), which ultimately limits the potential for rentable multifamily space and overall building efficiency.

Below are four examples highlighting correctable office-to-residential floorplates. Figure 1 highlights the most correctable floorplate, with no dead walls and minimal non-rentable space. Figures 2-4, although correctable, highlight floor plates with more non-rentable space and dead walls, reducing building efficiency and limiting conversion potential.

Figure 8: Office-to-Residential Conversions: Floor-Plate-Width Analysis

Conversion Benefits and Savings

Figure 9: Office-to-Residential Conversions: Cost Analysis

Under current economic conditions, conversion activity is likely to continue to bring new life to neighborhoods, while having a limited effect on overall supply and demand levels.

Office vacancy is expected to remain above historical levels for the next several years, particularly in distressed and obsolete properties. Where the value of office buildings drops, conversion to residential becomes more viable. Additional factors such as stabilizing construction costs or exceptional rent growth could increase future conversion volume. Changes to marginal costs could provide attractive returns for developers, thus spurring adaptive reuse projects. Partial demolition projects are another tailwind for growth as developers strip portions of the existing structure for another use, thus helping their underlying financials and creating value to the surrounding area.

As conditions change, further opportunities for conversion can arise. Building owners, local governments and other stakeholders are evaluating these circumstances to seize opportunities for revitalization through adaptive reuse of office properties.