David Marino, Senior Executive Managing Director of Hughes Marino.
A fundamental tenet of real estate valuation and development is that land gravitates to the highest and best use. The United States has a residential real estate crisis, where Zillow reported in 2024 that there’s a shortage of approximately 4.5 million housing units.
Simultaneously, the U.S. office sector is in crisis. According to CoStar, about two-thirds of the United States’ largest metro markets are running above 20% availability, with some like Denver at 26% and San Francisco at 32.4% as of the first quarter of 2025. While these percentages are high, it’s on a base of office space that’s grown substantially in recent years, creating a real dilemma where there’s a historically significant amount of office space available for lease and sublease today.
Office Space Converted To Residential, But Without Meaningful Effect
It’s my estimation that there is at least 500 million square feet of office space that needs to come off the market in the next five years to provide some stability for the office market sector. That won’t happen through leasing, as in my professional estimation, corporate America is going to continue to shrink its footprint over the next five years as the balance of the pre-Covid leases all expire.
In response to this supply glut, forward-looking municipalities have been scrambling to rezone office buildings for residential use, and savvy developers are looking to buy candidate office buildings for residential conversion.
However, many office buildings cannot be converted due to their floor plate size or shape, structural or other building systems limitations, and a multitude of other reasons. RentCafe estimates that there are approximately 71,000 apartment units currently under construction and planned through office conversions. Conversion of office to residential isn’t the answer to taking office out of inventory and addressing our national housing shortage. At that pace, we’ll satisfy the 4.5 million housing unit shortage in exactly 63 years!
A Solution: Tear The Office Buildings Down
Conversion of office to residential is a drop in the bucket, but the supply residential spigot is about to be turned on across the United States, through the demolition of office buildings and using the land to build multifamily residential. I’ve noticed some savvy developers and investors are finding commercial office buildings to purchase through foreclosure or at steep discounts, where the value is based on the underlying residential land development potential minus the office building demolition cost.
In real time, the conversation is shifting from conversion of office to residential, instead to tearing down office buildings and repurposing the underlying land to its highest and best residential use. There are multiple examples of this happening in real time throughout major metro areas across the U.S., most not on the market year as their completion is still 2-3 years away.
The Need For Widespread Zoning Changes—From Commercial To Residential
This could be the future for much of America’s excess office space—complete demolition to make way for the essential residential real estate that our country needs. Smart municipalities are already starting to figure this out, and I think the best thing states and cities can do is to rezone their entire office markets to allow for residential. I’m not talking about one-at-a-time project rezoning, but rather a complete and broad rezoning of all commercial offices for residential use.
Our cities changed in the last 70 years, from having people live and work in the same area, to building suburban residential communities that operate at a distance from commercial centers. This forced people onto mass transit and into their cars, creating congestion and pollution.
By tearing down office buildings, which often exist near mass transit nodes and generally along major transportation corridors, we have an opportunity to put more residential real estate where the office job centers remain and ease congestion. This could improve companies’ efforts to implement return-to-office policies, as a common objection employees have to coming into the office is the dollar cost and opportunity cost of commuting. In this way, we could simultaneously address the problems of too much office space, too little residential, return-to-office, pollution and congestion in our urban areas.
Positioning The Real Estate Industry For Future Success
In addition to rezoning commercial to residential use, municipalities could reduce the amount of impact fees they charge for new residential development on these former office sites. For example, municipalities charge traffic mitigation fees, yet these redevelopment opportunities could reduce traffic and congestion by their very nature. If an office building is torn down, why would a city charge new water/sewer hookup fees when the office building demolition will remove hundreds of toilets, sinks and dishwashers that are already hooked up?
Reducing the cost of development is an essential step if we expect to make housing more affordable and available, and these are easy places to start. Cities could also fast-track permits and inspections for these projects, as delays cost developers real money and contribute to the lack of availability of housing at the speed and cost that we need it delivered.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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