Each year, California’s population continues to grow at a rapid rate. And yet, residential construction has slowed in recent years, dramatically so in 2020. While state legislators have attempted to ease the housing crunch by encouraging more new construction, another, under-reported form of housing inventory additions is through the adaptive reuse of commercial properties.

Through the 1990s, hotels were the most common building to be converted into apartments. In the 2000s, the preference changed to former factories, resulting in the ubiquitous loft-style apartment. Since the 2010s, offices have been the main source of apartment conversions, according to Rent Café.

While converted apartments span the range of price tiers, apartment buildings with more storied histories and character tend to go to mid- and high-tier apartments. On the other hand, hotel conversions tend toward low-tier rentals.

Since the 1950s, Los Angeles has seen 74 conversions, creating 10,600 units, with most of these apartment buildings adapted from old hotels. In San Francisco, 40 conversions have been completed, creating 4,900 units. The majority of apartment conversions in San Francisco were also adapted from hotels, according to Rent café.

The vast majority of these conversions have taken place in the past two decades.

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More conversions ahead

More residential units are desperately needed to fill California’s ever-expanding housing needs. The number of new housing units started in 2020 is on track to end the year 10% below 2019. This is a further loss from the 6% decrease experienced in 2019.

However, apartment conversions are not included in Census data collection of new construction units, data reported by firsttuesday. At the same time, the benefits remain the same for apartment conversions as new construction units, and in fact are even greater due to shorter completion times and lower costs for conversions.

Looking ahead, expect to see apartment and condominium conversions become more common. The 2020 recession has caused many businesses to go remote, leaving their office spaces vacant.

Landlords will be best positioned for the rocky years ahead by incorporating different types of flexible space, including space that can be used as office space one year and residential the next, according to GlobeSt. Both residential and commercial tenants have shown an appreciation for mixed use property, including retail, restaurant, office and residential units all in the same building. Thus, conversions and flex space can be easy sells to landlords concerned with shifting demand.

At this point in the 2020 recession, the commercial market most in need of flexibility is the hotel industry. Over 10% of lodging properties were 121 days or more delinquent as of September 2020, according to Moody’s Analytics. Expect to see at least some of these hotels sold and re-purposed for multi-family housing in the next one-to-two years.