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Subject: Analysis of “What’s Holding Back Office-to-Residential Conversions in Texas?” – Texas Real Estate Research Center

Source: Texas Real Estate Research Center Website, Article: “What’s Holding Back Office-to-Residential Conversions in Texas?” by Harold D. Hunt, Feb 13, 2025

Executive Summary:

This briefing document summarizes the key findings from the Texas Real Estate Research Center article, “What’s Holding Back Office-to-Residential Conversions in Texas?”. The article examines the trend of converting older office buildings to residential units (OTR conversions) in Texas, highlighting the factors driving this trend, the challenges involved, and the potential for future growth. The core takeaway is that while OTR conversions are increasing in Texas due to post-COVID office vacancies and a growing housing need, the costly and complex nature of these projects, coupled with a lack of widespread incentives, is hindering more extensive development. The article expresses hope that predicted office “fire sales” will lead to increased conversions.

Key Themes and Ideas:

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• Increased OTR Conversion Activity: The article acknowledges a rise in OTR conversions in Texas, particularly since the COVID-19 pandemic, due to the rise of remote and hybrid work and increased office vacancies.
  
• “Although the number of conversions is still relatively small, activity has begun to pick up. This is partly due to the popularity of remote and hybrid work post-COVID-19, resulting in elevated office vacancies.”
  
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• National Trend: The article places Texas OTR activity in the context of a larger US trend. It notes a significant increase in U.S. OTR conversions between 2021 and 2024.
  
• “Yardi Matrix, a firm providing market intelligence tools to real estate professionals, reported that U.S. OTR conversions increased by 357 percent from 2021 to 2024, with about 55,000 conversions to residential units recorded.”
  
• “Estimates by Yardi Matrix and commercial real estate services company CBRE are forecasting that the level of future U.S. OTR conversions during the next decade will be somewhere between 1.2 and 1.38 billion-sf. That’s not an insignificant amount.”
  
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• Dallas Leads Texas in Conversions: Within Texas, Dallas is identified as the most active metro area for OTR conversions.
  
• “However, the Dallas metro ranked a distant third with 3,163 residential unit conversions in the pipeline. Dallas has emerged as the most popular Texas metro for OTR conversions so far.”
  
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• Challenges of OTR Conversions: The article stresses that OTR projects are “costly and complex” due to the necessary reconfiguration of the buildings. This complexity is a significant barrier to wider adoption.
  
• “These types of OTR projects are costly and complex due to the level of reconfiguration that must occur.”
  
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• Incentives as a Catalyst: The article suggests that financial incentives, such as those offered in Houston, can play a crucial role in boosting the number of OTR conversions. The lack of such incentives in other Texas cities is identified as a limiting factor.
  
• “In Houston, the Downtown Living Initiative provides up to $15,000 per unit in tax rebates for residential development. Although there are some incentives being proposed in other Texas cities, they are not in place yet.”
  
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• Potential for Increased Conversions Due to Office ‘Fire Sales’: The article refers to predictions of future office building sales at discounted prices due to financial difficulties. This scenario could create opportunities for more OTR conversions as investors seek to repurpose struggling properties.
  
• “Some industry professionals are predicting a wave of office fire sales that could lead to increased OTR conversions of older, less attractive office properties. In an October 2024 Business Insider interview, Richard Barkham, chief global economist for CBRE, predicted that a wave of offices will be going back to banks in the next two to three years where they will be sold at a discount and either demolished or converted.”
  
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• OTR as a Solution to Housing Shortage: The author explicitly connects OTR conversions to addressing the national housing shortage and declining office space demand.
  
• “Barkham believes that, with the ongoing housing shortage in the U.S. and declining demand for office space, OTR conversions could provide a lifeline for struggling real estate investors. I, for one, hope he’s right.”
  
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• Focus on Older Class A Buildings: The article focuses on converting older Class A office buildings constructed in the 1980s due to overbuilding and changing demand.
  
• “We chose to target downtown Class A office buildings located in the five major Texas metros (Dallas and Fort Worth were examined separately) constructed during the 1980s, such as One American Center in Austin and Bank of America Plaza in Dallas.”
  

Conclusion:

The article paints a picture of growing, but still limited, OTR conversion activity in Texas. While post-COVID market conditions are favorable and Dallas is emerging as a leader, the complexities and costs of conversion, alongside a lack of widespread financial incentives, present significant obstacles. The prospect of discounted office building sales offers a potential catalyst for future growth, and the author clearly views OTR conversions as a valuable tool in addressing both housing shortages and struggling commercial real estate investments.convert_to_textConvert to source