A major shift is coming to America’s commercial real estate market, and Phoenix may be about to see its impact. With the rise of remote work and aging office buildings sitting vacant, real estate experts predict a wave of office spaces could soon be transformed into much-needed housing. This transition, while challenging, presents an incredible opportunity to ease the housing crisis gripping cities like Phoenix.
The Office Market Faces a Crisis.
As many office buildings struggle to attract tenants, especially older properties, they are facing increasing levels of distress. These “Class B” office buildings — often in need of extensive renovation to remain competitive — are now experiencing vacancy rates as high as 80%, according to Richard Barkham, chief global economist at CBRE, one of the world’s largest commercial real estate firms. He predicts that many of these buildings could either be demolished or converted into residential units in the coming years.
For Phoenix, a city already facing a growing demand for housing, this could mean a significant increase in supply. Some real estate experts believe this shift could unleash over a billion square feet of housing across the U.S. over the next decade. And Phoenix, with its expanding population, is poised to be a key beneficiary of these conversions.
A Billion Square Feet of New Housing?
There’s potential for around 1.2 billion square feet of vacant office space nationwide to be transformed into residential properties, according to data from real estate analytics firm Yardi Matrix. The surge in office-to-apartment conversions has already begun, with 55,000 units expected to be created in 2024 alone — a staggering 357% increase from just three years ago. Real estate attorney John Vavas, who now frequently works on such deals, notes that before the pandemic, this type of conversion was almost unheard of. Now, it’s becoming the most common way for developers to handle unused office spaces.
Phoenix could be a hot spot for these projects. The city has long struggled with a shortage of affordable housing, and the pandemic-driven increase in remote work means many companies no longer need the same amount of office space. In major cities across the U.S., including Phoenix, there’s an opportunity to turn this unused office stock into much-needed housing.
Phoenix’s Commercial Real Estate Shift.
Commercial real estate across the U.S. has seen a dip in demand since the pandemic, with vacancy rates rising. For Phoenix, the office vacancy rate now sits close to 19.4%. This leaves significant opportunities for developers and investors looking to pivot from office rentals to residential properties. In fact, commercial real estate loans are seeing tightening standards, and buildings that were once too expensive are now being sold at steep discounts.
Conversions, while complex, are being embraced as a solution. It’s an expensive process, but for landlords stuck with vacant office spaces, it’s a way to recover some of their losses. One New York-based real estate firm, Silverstein Properties, has even committed $1.5 billion to convert some of its properties.
The Impact on Phoenix
Phoenix’s residential demand has been growing faster than supply, creating an opportunity for developers to tackle the housing shortage. The shift from office to apartment might be slow, but it holds great potential to transform the real estate landscape of the city.
Several cities, including Phoenix, are already seeing increased conversion activity, with 19,462 units in development across various metros. For Phoenix residents, this could mean shorter commutes, new shopping areas, restaurants, and entertainment popping up in formerly desolate office districts. It’s a process that will likely unfold over the next decade, according to experts, but it is clear that office buildings — once a symbol of corporate America — may soon be where families live, grow, and thrive.
As Barkham explains, the transformation is inevitable. “We simply don’t need as much office space as we once did,” he says, predicting that by 2025, many poorly performing office buildings will either be converted or go bust. For Phoenix, this is a once-in-a-generation chance to reshape the city, adding desperately needed housing and revitalizing entire neighborhoods.
