Can empty office space help solve the housing shortage?

The 15-story Fidelity & Deposit Building in downtown Baltimore has sat empty for nearly two decades. Inside the lobby, the building’s former grandeur is evident in the ornate marble columns and faded gold detailing on the arched ceiling.

Built in 1894, the former office tower will soon have a new life. Developer Trademark Investments bought the building last year and plans to convert it into a mix of commercial space and 231 rental apartments. 

“For us, this was a perfect opportunity,” said Patrick Grace, owner of Trademark Investments. “The location is great, the building’s awesome, it lays out well for apartments.”

And it’s full of vintage charm, like the giant bank vault in a space Grace plans to turn into a restaurant, and the intricately carved railing on the staircase. “That would be insanely expensive to try to recreate, and it looks nicer than a builder’s grade staircase that we would do now,” Grace said.

Converting an old building — built for an entirely different purpose — also presents challenges, like adding a second stairwell to meet residential code. Trademark bought the building for $6 million last year and will put another $47 million into construction.

The Fidelity building emptied out long before the pandemic, but the recent shift to hybrid work has left office buildings underused around the country. Cities including Houston, San Francisco, Chicago and Washington, D.C. have office vacancy rates north of 15%, according to the National Association of Realtors. By the end of this decade, the commercial real estate firm Cushman and Wakefield estimates vacant office space will increase to 1.1 billion square feet, with 330 million square feet considered “excess vacancy attributable to remote and hybrid strategies.” 

To make use of that space and add much-needed housing, more developers are looking at conversions, said Doug Ressler, who follows the commercial real estate market at Yardi Matrix, a research firm.

“It’s been increasing in the last three years by about 5% to 10% in terms of total square footage, each and every year, of converted offices,” Ressler said. 

Between 2020 and 2021, according to Yardi data, office-to-apartment conversions grew at a faster rate than new construction, adding 11,000 apartments nationally. New York City recently announced plans to create thousands of new apartments by converting unused office space.

“One of the things that you see is a tremendous amount of pressure on governments, cities, states, to be able to meet the affordable housing shortfall that has really been with us for almost a decade now,” Ressler said. 

Ressler and others doubt that office conversions will make a big dent in that shortfall, however. Last year, Moody’s Analytics evaluated about 1,100 office buildings in New York City for potential conversion.

“We basically found that about maybe 3% could be viable,” said Kevin Fagan, head of the firm’s commercial real estate economic analysis.  

There are just too many obstacles, Fagan said. Offices tend to have larger floor space, for example, with central areas cut off from natural light.

“There isn’t the need for natural light in the middle,” he said. “You’re not living there, you’re there for a certain amount of time, and you put your young analyst in a lightless office in the middle, and that’s OK.” 

That doesn’t work for residential space though, said Fagan. There may also be existing tenants to buy out, or plumbing and windows to replace.

“A lot of times in the development world, what people will say is that you’re better off building from scratch than you are doing a renovation,” Fagan said.

For Grace at Trademark Investments, the end result is worth the hassle.

“It’s going to look awesome,” he said of the Fidelity Building, which Trademark estimates will begin leasing in 2025. “It’s like you’re walking into a building that’s done and it’s modern, but you have this piece of history that is still alive.”

As for what a finished office-turned-apartment might look like, Trademark’s asset manager Eva Hodsdon showed me another old building the company is converting nearby. Inside, the apartments mostly look like what you’d find in any new building, with quartz countertops and stainless appliances. 

“This is probably — out of all the units that I have in my portfolio — the one that might feel the most ‘commercial conversion,’” Hodsdon said, as we walked into a large ground-floor unit where a storefront might have been. 

In the bedroom, floor-to-ceiling plate glass windows looked right out onto the busy sidewalk.

“There is a flexibility that you need to have with conversion,” said Hodsdon. “If a tenant comes in here, and they’re like, ‘I want this whole window screened, or I want some sort of soundproofing on it,’ that’s always a conversation we’re open to, because we want this space to work for them as well.”

Hodsdon lives in a converted apartment herself, in a former law office. Other than the dark wood paneling and some legal motifs in the building, she said, you’d never know.