A record-breaking amount of adaptive reuse projects occurred across the US in 2021, and even though Dallas hasn’t historically been an active market for adaptive reuse, that’s about to change.
While most people think of adaptive reuse as repositioning an architecturally significant historic building for modern use, it can and often does include the repurposing of any vacant, unused, underused, and abandoned building for a new and better use.
A confluence of factors creates lucrative opportunities for office-to-multifamily conversions not only in Dallas but in America’s largest cities. The ongoing adoption of a remote or hybrid work model is adding office space to an already massive inventory of aging, underused buildings. Tenants are choosing to relocate to newer office buildings with amenities and attributes that will entice employees to return to the office, as well as attract and retain talent.
At the same time, the cost of single-family homes is increasing and subsequently pricing many would-be homeowners out of the market and forcing them to remain in rental housing. Yet there’s not enough multifamily housing to meet existing or future demand, which creates intriguing opportunities for many office owners.
Record-breaking year for adaptive reuse
Adapting a structure rather than building a new one can save time and may also save money. Often, the construction process for adaptive reuse is 25 to 40% faster since the site is already under control and entitled. Meanwhile, renovation costs for adaptive reuse are reduced by as much as 40% compared to new construction.
Additionally, with more developers, owners, and residents concerned about climate change and focused on sustainability, the process of reusing and retrofitting an existing building instead of building from the ground up is appealing.
However, not every office building is appropriate for multifamily conversions. Buildings constructed between the 1960s and the 1980s with square or rectangular floor plates, smaller floor plates, shallow footprints, and a central core offer more optimal adaptive reuse opportunities.
Last year, developers created 20,100 multifamily units by repurposing existing buildings, according to Rent Café. That’s almost double the number of apartments converted in 2020 and 2019 combined. Through adaptive reuse alone, this new decade has already created nearly 32,000 apartments, 41% of which are in former office buildings.
Opportunities for repurposing Dallas properties
It’s well known that Dallas has a glut of office buildings that are partly vacant and/or obsolete. The downtown office market (including the CBD and the Uptown/Oak Lawn submarket) consists of 40.9 million square feet as of late March. Of that total, 29.3 percent is vacant, according to JLL. The vacancy rate is even higher for the CBD alone – 32.7 percent.
However, JLL expects office-to-residential conversions to reverse large amounts of vacancy in Dallas’ CBD in the coming months. Currently, the city ranks 11th in the US for office-to-residential adaptive reuse, according to Rent Café. It counted 27 buildings that have been repurposed into 4,797 new apartment units.
Dallas’ growing population will play a role in rightsizing office stock, according to JLL. The latest stats show that developers and owners are planning to convert nearly 1 million square feet of CBD office space into luxury apartments and hotels.
Limited apartment vacancy leads to soaring rents
Right now, new construction of single-family homes and multifamily units can’t accommodate existing residents, let alone those who are moving to the area. For the first time since 2016, annual inventory growth in Dallas-Fort Worth fell below 3%, according to Marcus & Millichap. Though the area has occupied a spot inside the top 10 for fastest supply growth among major US markets in each of the past six years, it dropped to 14th in 2022.
Apartment vacancy has dwindled to just 2.7% – not only the lowest on record, but 160 basis points under the 2000 to 2020 trough. As a result, rental rates have increased with the average effective rent soaring to $1,445 per month in Q1, according to Marcus & Millichap. Greater Dallas experienced a 17.8% rent lift last year, slightly outpacing the 15.5% increase recorded in the greater Fort Worth region.
By 2030, Dallas-Fort Worth is projected to surpass the Chicago metropolitan area, becoming the third-largest metro area in the country behind New York City and Los Angeles. Job growth is driving the population boom: the DFW metro ranks first in the nation for jobs added on a net basis since the onset of the pandemic.
Roughly 140,800 new jobs were created between February 2020 and February 2022, according to the US Census Bureau. Experts expect the surplus to stretch to 255,000 jobs by year-end.
The bottom line is that Dallas needs more housing to continue to thrive. The fast-track nature of adaptive reuse makes it a crucial element in the creation of multifamily supply necessary to house a massive influx of residents.