We have lift off! Multi-family conversions skyrocket in the 2020s

For the past decade, builders have been quietly investing in multi-family conversions as the most cost-effective method to generate multi-family housing. But it was only recently at the start of 2020s that these conversions took off.

For perspective, only 5,300 multi-family conversions took place in 2010, while 20,100 multi-family conversions took place in 2021, the most annual conversions to have taken place in the last decade.

In 2020 and 2021, Los Angeles made the top five in the nation for:

most converted multi-family units, and
most office-to-multi-family unit conversions, according to a RENTCafé analysis.

Not only that, L.A. ranked number one for most future conversions with 4,300 units in the queue to be completed in 2022 and after.

New multi-family construction is costly, and demolition is known to cause high environmental impact. To avoid these financial setbacks, over the past decade builders have been steadily moving towards adaptive reuse of emptied or unused properties such as hotels, office buildings, and factories.

This recycling method keeps the builder within budget and has the potential of increasing their return-on-investment (ROI) by lowering the cost-per-unit when the building is less expensive than the cost of site acquisition for new construction.

Although builders have long been converting apartments, the significant nationwide increase in 2020-2021 points to new factors influencing residential construction.

Commercial vacancies turn into opportunity

The pandemic was certainly the launchpad that allowed for even more multi-family conversions to take off at the start of the 2020s. Hotels, office buildings, and factories were emptied due to stay-at-home orders that eventually turned into prolonged shutdowns, and remote working. In the wake of a massive hospitality industry crisis, companies were forced to rethink their strategies to survive the 2020 recession.

To save their dying businesses, conversions took place and builders jumped at the opportunity to invest. For example, the famous Cecil Hotel in L.A. decided to convert to a hybrid hotel and multi-family building, which will house a total of 290 multi-family units. The four-story Art Deco office building also located in L.A., the Mayer Building, is expected to convert to 79 low- and moderate- income units .

In 2021, the most popular multi-family conversion building types nationwide are:

office buildings with 7,400 multi-family units created;
factories with 3,400 multi-family units created; and
hotels with 2,800 multi-family units created, according to RENTCafé.

Over the last decade, the increase in the number of rental units created from conversions was most seen in office buildings. Public demand for multi-family housing located in urban settings has increased, where office buildings are abundantly located.

It’s expected that apartment conversions will continue to increase in the next decade, with builders moving away from expensive single-family-residence (SFR) construction towards cheaper multi-family construction. Builders don’t have to worry about site acquisition, environmental restrictions, let alone the costs of building an entirely new property from scratch.

There is a possibility that just as the Cecil hotel converted itself into a hybrid form, other companies may feel the financial pressure to follow.

Live-work development

The pandemic has had lasting impacts on the way people live and work. With stay-at-home orders that turned into remote working, many workers ended up staying fully remote in the long term, with others working remotely part-time. Live-work development became even more popular.

A live-work unit is a single unit such as a studio, loft, or one bedroom, which is both a commercial/office and a residential space, occupied by the same resident. There are three types of live-work units:

live-with, when living and working occur in the same space;
live-near, when living and working are separated by a wall, floor or ceiling; and
live-nearby, when living and working occur on the same property but not necessarily in the same building.

Live-work development requires flexible zoning since they fall under the mixed-use zoning regulatory umbrella. Currently, local governments can choose what sort of rules to apply to live-work units. But no rules or building standards specific to live-work units exist at the state level. And due to their multi-purpose nature, regulations for building these units aren’t always clear. Live-work developments are awaiting more guidance, especially at the state-level.

California legislators are aware of the confusion surrounding live-work development. AB 565 passed in 2018 to direct California’s Department of Housing and Community Development to clarify portions of the California Building Code, to clear up confusion around constructing live-work units.

No one could have predicted how popular live-work areas would become in 2020, but now it’s important that California legislators provide more guidance surrounding live-work development and regulation. Otherwise, local governments, will lack the ability to efficiently regulate live-work and other hybrid developments and make sure it’s safe for everyone.

The momentum driving today’s high rate of multi-family conversions continues to grow. Watch for this trend to continue even after the pandemic’s influence wanes in 2022 and the years that follow.