By Audrey Jensen | Phoenix Business Journal
Nearly 40 office properties in the Valley were identified as the top candidates for conversion to apartments by researchers at Columbia University and New York University.
Office conversions have been raised as a potential solution for the void left in office space across the country following the Covid-19 pandemic as employers have shifted to remote or hybrid work and significantly downsized their footprints.
These conversions could improve property values and also address affordability and greenhouse gas emissions of aging buildings, according to the report for National Bureau of Economic Research authored by Stijn Van Nieuwerburgh, Arpit Gupta and Candy Martinez.
The team analyzed office space across 20 major U.S. metros and narrowed the selection of buildings to ones developed prior to 1990 and that are larger than 25,000 square feet with floor plates smaller than 60 feet, measuring the distance from the window to the core of the building.
They found that about 11% of all office buildings across the U.S. were suitable for conversion based on this criteria, including 37 struggling office properties across the Valley.
Class B, C offices most likely conversion candidates
The buildings identified in Phoenix are mostly smaller, class B and C offices in central Phoenix with a few in Scottsdale and Mesa. The list also included some high-profile buildings such as the 18-story Monroe building at 111 W. Monroe St. that was built in 1963 and the Heard building at 112 N. Central Ave. that was built in 1919, both in downtown Phoenix.
The Phoenix-area properties identified totaled about 2.156 million square feet of space, or about 2.2% of the overall Valley market, which currently has more than 96 million square feet of office space, according to CBRE Group Inc. data.
The Midtown submarket — where the largest cluster of office buildings identified as conversion candidates are located — had a 30.3% vacancy in the third quarter of 2023 and saw a negative absorption of 30,774 square feet, bringing the year-to-date absorption to negative 509,808 square feet in the area, according to Cushman & Wakefield research.
How developers use old offices in Phoenix metro
While conversions of aging office buildings to apartments could address a number of issues, real estate experts say this type of development can be far costlier and more complex than building from the ground up.
Some developers in Phoenix have jumped on the trend, but not without roadblocks.
The Phoenix metro had a dozen office conversion projects in the works or completed as of Q3 2022 totaling 1.3 million square feet, according to CBRE Group Inc. research. About six of these were conversion to multifamily, including projects such as Zanjero Falls in Glendale and the high-profile One Camelback project.
After years of planning and delays, One Camelback is about 80% completed. It could be one of the largest office-to-apartment conversions in Phoenix but after running into a major snag this year, it’s unclear what will happen to the project after millions of dollars were put into construction.
Although not the highest vacancy rate in the Phoenix area, Midtown was one of the top submarkets identified by Cushman & Wakefield with the most vacant square footage. Midtown had about 2.7 million square feet of vacant space in Q3.
9th Largest Valley Office Vacancy as of Q2 2023
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