Why Office-to-Residential Conversions Are Unlikely in Portland and Beyond

We often hear people ask: “Why don’t we just convert struggling office buildings into residential housing?” On the surface, it sounds like a great solution to two pressing challenges: vacant office spaces and a shortage of housing units, particularly in cities like Portland, Oregon, where the housing deficit is estimated at a staggering 80,000 units[1]. If it’s such an obvious answer, then why aren’t we seeing office-to-residential conversions happening at scale—not just in Portland, but across the nation?

As it turns out, the reasons are more complex than they appear. This newsletter will break down why such conversions are rare, what makes them so difficult, and what the actual impact would be if we attempted them.

A Look at the Market Reality

First, let’s examine the broader market conditions. The best office buildings—Class A properties in prime locations—have proven more resilient during the post-COVID shift to hybrid work. On average, these buildings experienced only a 10% reduction in occupancy or net operating income (NOI)[2]. While not insignificant, they are far from being “distressed assets” and are generally not considered candidates for conversion.

In contrast, Class B and C office properties are facing much higher vacancy rates, particularly in cities like Portland, which currently leads the nation with an office vacancy rate nearing 30%[3]. These older, less competitive buildings are the ones most likely to be vacant and, therefore, potential candidates for conversion. However, significant challenges remain even for these properties.

Nationally, office vacancy rates paint a diverse picture. For instance, New York City’s Class B and C office buildings have a vacancy rate of around 18%, while markets like Austin and Miami are seeing much lower vacancies, reflecting the migration trends of businesses and workers to Sun Belt states[4]. In this national context, Portland’s vacancy challenges are among the most severe.

“Many older office buildings in Portland, especially those built before the widespread adoption of central air conditioning, have large floor plates, limited plumbing infrastructure, and inefficient layouts that make residential conversion nearly impossible without extensive (and costly) reconfigurations.”

Why It’s So Difficult to Convert Offices to Housing

Let’s start with the basics: for a building to be a viable candidate for conversion, it needs to be either entirely vacant or at least mostly vacant. If an office building still houses tenants, the logistical, legal, and financial hurdles of terminating leases and displacing occupants can be prohibitively expensive and time-consuming.

Next, we must consider the buildings themselves. Many older office buildings in Portland, especially those built before the widespread adoption of central air conditioning, have large floor plates, limited plumbing infrastructure, and inefficient layouts that make residential conversion nearly impossible without extensive (and costly) reconfigurations. For example:

Plumbing and Mechanical Systems: Residential units require far more plumbing and HVAC distribution than office layouts, particularly for bathrooms and kitchens.

Access to Light and Ventilation: Large floor plates often mean that interior spaces lack windows, making them unsuitable for residential use without major structural changes.

Structural Issues: Retrofitting a building to meet residential safety codes can require expensive reinforcements or modifications.

These design constraints, coupled with the financial realities, eliminate a significant portion of Portland’s 41.96 million square feet of office inventory from being viable candidates for residential conversion[5]. Nationally, similar structural challenges apply, particularly in cities with older building stock like Chicago and Philadelphia.

The Numbers: What Conversion Could Actually Accomplish

Even if we assume that every suitable office building in Portland were converted into residential housing, the impact would be relatively modest. Here’s what the math looks like:

Suitable Space: Approximately 4.6 million square feet of office space (11% of Portland’s total office inventory) could realistically be converted[6]. This calculation is based on identifying properties that are either entirely vacant or have vacancy levels high enough to make conversion financially feasible. To arrive at the 4.6 million square feet, analysts considered the overall office inventory of 41.96 million square feet and applied filters for structural suitability, vacancy, and location desirability. This 11% represents buildings with layouts conducive to residential adaptation, such as manageable floor plates and access to natural light and ventilation, while excluding properties with significant structural or zoning constraints.

Potential Units: Assuming an average unit size of 746 square feet, this would result in approximately 6,100 housing units.

Cost: The estimated cost to convert all suitable office space is $1.15 billion, or about $186,500 per unit—cheaper than new construction but still a significant investment[7].

For comparison, cities like New York and San Francisco face similar challenges but have seen a handful of successful conversions due to higher housing demand and property values. For instance, the conversion of 25 Water Street in New York City resulted in 1,300 residential units, but at a cost exceeding $400 per square foot[8].

"The idea of converting struggling office buildings into residential housing is appealing but impractical in most cases. The structural, financial, and regulatory challenges are significant, and the impact—while helpful—is limited."

Challenges Beyond the Physical Buildings

Even if the physical and financial hurdles could be overcome, additional obstacles exist:

Ownership Structure: Many office properties are owned by pension funds, REITs, or private equity groups that are bound by bylaws and investment mandates, making them unlikely to approve drastic changes like conversions.

Zoning Issues: Cities must carefully manage zoning to maintain a balance of residential, office, retail, and industrial uses. Granting blanket zoning flexibility for conversions could disrupt this balance and create unintended consequences[9].

Economic Viability: The economic case for conversion depends heavily on housing demand and prices. In Portland, where housing prices have leveled off in recent years, the financial incentive for conversion is not as strong as in cities like Washington, D.C., where high demand supports these projects[10].

Lessons from Other Cities

Nationally, successful office-to-residential conversions are rare and occur mostly in markets with extreme housing demand and high property values. For example:

New York City: Projects like the transformation of 55 Broad Street have capitalized on high housing demand to justify conversion costs.

Washington, D.C.: The Cotton Annex building was converted into luxury apartments due to its smaller size and historical appeal, which made it a feasible candidate[11].

Chicago: The historic Old Post Office building was partially converted to mixed-use, including residential units. Its centralized location and smaller wings made portions of the structure viable for housing despite significant challenges[12].

Los Angeles: The former AT&T Center, now "The Beaudry," was transformed into a residential tower. High urban demand and the developer’s ability to repurpose existing infrastructure contributed to its success[13].

San Francisco: The conversion of 140 New Montgomery, a historic Art Deco office building, included luxury apartments that leveraged high market demand and federal tax credits for historic preservation[14].

In Portland, where demand and price pressures are not as extreme, such projects are less likely to pencil out.

The Takeaway

The idea of converting struggling office buildings into residential housing is appealing but impractical in most cases. The structural, financial, and regulatory challenges are significant, and the impact—while helpful—is limited. For Portland, converting every viable office building would cost over $1 billion and provide only 6,100 new housing units, falling far short of the city’s 80,000-unit shortage[1].

As attractive as conversion may sound, it is unlikely to be the silver bullet for Portland’s housing crisis. Instead, we must focus on more comprehensive solutions, including building new housing, streamlining permitting processes, and incentivizing affordable housing development. Conversion can play a supporting role, but it is not the answer on its own.

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Sources:

Portland Housing Bureau. (2023). Housing deficit report 2023. City of Portland. Retrieved from https://www.portland.gov/phb/state-of-housing-report

CBRE. (2023). U.S. real estate market outlook 2023. Retrieved from https://www.cbre.com/insights/books/us-real-estate-market-outlook-2023

CoStar. (2024). Q3 2024 vacancy report. (Subscription required).

National Association of Realtors. (2024). Commercial real estate trends 2024. (Accessed via NAR membership).

City of Portland. (n.d.). Office inventory report. (Available upon request from the City of Portland).

Jones Lang LaSalle (JLL). (n.d.). Conversion feasibility study. (Available upon request from JLL).

Urban Land Institute (ULI). (n.d.). Case study: Conversion costs and metrics. (Available via ULI membership).

Conversion projects gain ground in NYC. The New York Times. Retrieved from https://nytimes.com (Subscription required).

Portland Zoning Review Board. (n.d.). Reports on zoning for conversions. (Available upon request from City of Portland).

Washington, D.C. Office of Planning. (2023). Office conversion trends 2023. (Available upon request).

Cushman & Wakefield. (n.d.). Adaptive reuse projects nationwide.

(Available upon request).

LoopNet. (n.d.). Chicago’s historic Old Post Office redevelopment. Retrieved from https://loopnet.com

The Beaudry: A model for urban adaptive reuse. Los Angeles Times. Retrieved from https://latimes.com (Subscription required).

Historic conversions: 140 New Montgomery’s story. San Francisco Chronicle. Retrieved from https://sfchronicle.com (Subscription required).