The Pandemic’s Impact on Commercial Real Estate

While there’s a lot of cautious optimism that the worst of the Covid-19 pandemic is finally behind us, the pandemic has had a profound but uneven impact on commercial real estate, an impact that is likely to reverberate for years to come.

The pandemic gave a boost to the already surging industrial sector by accelerating the shift from in-person shopping to ecommerce, which in turn increased demand for and returns on warehouses and logistics centers.

Hotels, on the other hand, were absolutely clobbered, with 8 in 10 hotel rooms vacant in April 2020.1

Likewise, the pandemic jolted the office market as corporate layoffs, the shift to remote and hybrid work and office closures caused office vacancies to soar, especially in Class B and C buildings. According to Cushman & Wakefield, over 5.6 billion square feet of vacant office space was available as of Q4 20212, excess inventory that will take years to absorb, if ever.

Shopping malls, which were already struggling due to the ongoing shift to online sales and changing consumer shopping habits, were also hit hard by Covid-19. Bloomberg reports that at the end of 2021, there was over 90 million square feet of vacant space in US shopping malls3. As if to punctuate shopping mall’s troubles, Unibail-Rodamco-Westfield, parent company of leading US mall operator Westfield, announced in April plans to exit the US market by 2023.

Multifamily Demand Surges

Meanwhile, the growing demand for multi-family apartments of all classes continued unabated through the pandemic, driven by numerous social and economic factors, including the ongoing US housing shortage, labor and supply chain shortages and changing demographics and lifestyle preferences. CBRE reports that in 2021, net absorption for the US multifamily sector was +617,500 units, up 238% from 2020 and 97% from 2019.4

Adaptive Reuse on the Rise

With many office buildings, hotels and malls struggling while demand for and profits from multi-family properties surge, enterprising real estate developers, investors and lenders are increasingly turning to adaptive reuse and converting obsolete properties into new apartments to breathe new life into these old buildings and generate new revenue and profits from them.

As the number of multi-family conversions continues to grow and high-profile apartment conversions are increasingly in the financial, real estate and even mainstream news, we decided to take a closer look at multi-family conversions, their long and storied history and the economic and social dynamics currently driving the accelerating trend.

US Housing Shortage

One of the main factors driving the increase in multi-family conversions across all real estate sectors is the on-going housing shortage in the US, especially the lack of affordable housing, which has increased demand for all classes of apartments.

According to a report from the National Association of Realtors (NAR), from 2010 through 2020, demand for single and multifamily housing exceeded supply by 6.3 million units5. In addition, the median home price in the US has increased by 30% over the last decade6, due in part to lack of inventory and labor and supply chain shortages triggered by the pandemic, putting a new home purchase out of reach for many.

Rising Rents and Home Prices

As a result, housing prices and rents have continued to rise, making rental housing increasingly unaffordable for lower-income households. According to NAR, in 2020, 22.7% of multi-family units rented for $2,000 a month or more, compared to just 12.3% in 20177—nearly double in just three years.

With inflation surging over the past seven months8 and interest and mortgage rates expected to continue to increase this year, the demand for apartments is only expected to grow, making multi-family conversion a smart and potentially highly profitable bet for commercial real estate developers, investors and lenders.

The Plusses and Minuses of Multifamily Conversions

Before digging into the different types of multi-family conversions that are happening, let’s take a quick look at the pros and cons of adaptive reuse.

The Plusses

On the plus side, conversions can be:

  • Faster than new, ground up construction. The developer is starting with an existing building and making modifications instead of starting with a vacant plot of land and constructing a new building from the ground up, which takes much longer, especially if there’s already a building on the land that will need to be demolished.
  • Less expensive than new construction. Some experts estimate that adaptive reuse costs 30-40% less per unit than new construction9, a considerable cost savings. Because conversion is less expensive, developers and investors can reap bigger returns on their investments.
  • Better for the environment than new construction. With adaptive reuse, an existing building doesn’t need to be demolished and the debris hauled off, both of which emit pollution and carbon into the air. Likewise, less concrete, one of the top sources of carbon emissions, needs to be created. Also, fewer construction materials, natural resources and energy are generally used in adaptive reuse projects.
  • Less impactful on a city’s skyline and architectural profile than new construction, because an existing older building is being modified, not replaced with a new building with a different look and design.
  • Office to multi-family conversions create new housing near where people work, often in areas where it’s scarce.
  • Hotel to multi-family conversions often create new affordable housing, which is badly needed in the US right now, especially in or near big cities.
  • Tax credits- including historic restoration and affordable housing credits- may be available to help finance the project and improve its return on investment.
  • In some buildings, leasing can be staggered as individual floors or sections are converted, generating revenue from the project more quickly than having to wait until the entire building is completed.

The Minuses

The potential downsides of adaptive reuse include:

  • Contamination of the site and the need for expensive remediation, especially in the case of old factories and warehouses.
  • Hidden problems in older buildings, including mold contamination, asbestos, lead paint and broken concrete, all of which drive up development costs and lengthen the timeframe for the conversion.
  • Financing for adaptive reuse projects can be more complicated and difficult than for new construction, especially if historic or affordable housing tax credits or public funding is involved.
  • The approval process for adaptive reuse projects can be lengthy and expensive, especially if rezoning is involved or the building has landmark status.
  • What to do with existing tenants whose leases overlap the developer’s acquisition of the property.

A Case-by-Case Basis

Because the benefits and potential pitfalls vary greatly by real estate sector and individual property, potential conversions are always approached on a building-by-building basis, with project sponsors conducting an enormous amount of financial analysis, physical due diligence, legal and market research and careful planning before committing to a project.

The History of US Multi-Family Conversions

Although multi-family conversions have been in the news frequently as of late, they’re nothing new. In the 1960s, light industrial buildings in New York’s Cast Iron Historic District—now the SoHo District- were converted into live-work lofts. Then, in the 1980s, a wave of office to residential conversions took root in New York, followed by waves in Chicago, Los Angeles and other big cities starting in the 1990s10.

Other types of properties have also been converted into apartments, including factories, warehouses, former military bases, government buildings and in one rare instance, an old minor league baseball stadium.

As of September 2020, there were over 240,000 apartments for rent in large, repurposed buildings in the US.11

The Multifamily Conversion Trend Accelerates

To illustrate how much the conversion trend has accelerated, in the 1950s, just 14 buildings were converted into 2,000 units12. In 2021, 151 existing buildings were converted into approximately 20,100 units, a 900% increase13.

From the 1950s through the end of 2020, factories, with their large, open floor plans and minimal internal structures, accounted for most multi-family conversions, with 442 being converted into apartments14.

As far as units, office buildings far outpaced factories between 2013 and 2021, with an estimated 38,547 units created, followed by factories with 20,940 units created, then hotels with 14,118 units created15.

In 2021 alone, of the 20,100 apartments created through adaptive reuse, office buildings accounted for 7,415 units, factories 3,430 and hotels 2,84716.

2022 and Beyond

Looking ahead to 2022 and beyond, approximately 306 buildings are already slated for conversion into approximately 52,700 units. Office buildings are expected account for the largest share of conversions– 23.4%– followed by factories at 17.4% and hotels at 15.2%. Retail is expected to account for 4.4% of conversions17.

Up Next: Office to Apartment Conversions

That concludes Part 1 of our series on multi-family conversions. Next, an in-depth look at office to apartment conversions, which have emerged as the most popular type of multi-family conversions in recent years.

About The Author

Terry Banike is Realogic’s marketing manager. Over the course of his career, he has worked in marketing, communications, journalism and public relations, and has written numerous news stories and feature articles for newspapers, trade publications, newsletters and blogs. A rabid reader of anything and everything on commercial real estate, Terry closely follows industry news and trends and frequently posts about real estate on the Realogic Blog. He can be reached at

1,5,35,36,37,38-National Association of Realtors; Case Studies on Repurposing Hotels/Motels into Multifamily Housing; 2021
2-Cushman & Wakefield; At A Glance: Office Sublease Space; North America | Q4 2021; February 2022
3-Bloomberg; Malls Ditch Shopping to Fill Wasteland of Vacant Retail Stores; December 9, 2021
4-Multifamily Executive; Multifamily Sees Record Demand in 2021; February 1, 2022
6,7-CNBC; Home prices are now rising much faster than incomes, studies show; November 10, 2021
8-Trading Economics; United States Inflation Rate
9,11,13,15,16,17,32,33,34-RentCafe; Record Apartment Conversions Make 2021 Most Successful Year in Adaptive Reuse; October 6, 2021
10,21-Metropolis; Could Your Empty Office Turn Into Apartments?; April 20, 2021
12-Chicago Agent Magazine; Chicago Is A Top City for Commercial-to-Apartment Conversions; October 5, 2020
14-Rental Housing Journal; Former Factories, Office Buildings Becoming Apartment Conversions; October 6, 2020