The U.S. office market is in its toughest stretch in decades. Despite aggressive return-to-work pushes, swaths of unused space are becoming zombie buildings—dragging down the value of once-thriving city centers and bleeding millions in lost tax revenue.

Now, local governments are scrambling to breathe life (and dollars) back into these dead assets. At the same time, the nation’s affordable housing crisis is only getting worse.

So how do you kill two birds with one stone? Turn vacant office buildings into housing.

But is this feasible?

The initiative is rife with challenges, from the scale of construction to the cost, compounded by likely inflation from tariffs. So, will you see new apartments in old office buildings? Time will tell.

In this article we cover:

• Why local governments are dangling tax breaks to make conversions pencil
• The biggest structural and financial roadblocks facing adaptive reuse
• How new tariffs could quietly sabotage these projects before they start
• What early efforts in cities like D.C., Boston, and Seattle reveal about the future of downtowns

Residential Conversions in the DMV

In Montgomery County, Maryland, officials recently passed a zoning change to fast-track office-to-residential conversions and approved a 20-year property tax abatement for projects that dedicate at least 17.5% of units to affordable housing.

While the plan has drawn criticism for sacrificing future tax revenue, county councilmembers argue that the unprecedented 25 % vacancy rate in parts of its office market needs to be accounted for.

Empty office buildings are already a drag on tax rolls—and the idea is that redeveloping them into housing will ultimately be a net positive.

The DMV (District of Columbia, Maryland, and Virginia) area has pushed for conversions for several years. Washington, DC, launched a tax abatement program in 2022 and has since moved to reclassify converting properties as residential earlier in the process, giving developers a financial edge over drawn-out rezoning processes.

The problem is that these projects are expensive (and will likely be getting a lot more costly soon).

So, the incentive structure in D.C. is designed to make these projects pencil out, especially in neighborhoods where Class B and C buildings are hemorrhaging tenants.

With leasing activity down and no rebound in sight for older assets, repositioning can be a survival tactic. Conversions, when viable, allow landlords to extract new value from outdated space—and provide municipalities a chance to revive dead zones with residential density.

In Arlington County, Virginia, officials have followed suit, loosening zoning rules and streamlining the approval process to make conversions easier and faster.

Do Residential Conversions Pencil?

Even with streamlined approvals and tax abatements, office-to-residential conversions are anything but turnkey.

These projects come with significant financial and structural hurdles—often requiring full gut renovations, extensive plumbing rework, and reconfiguring floor plates that were never designed for residential use. The cost per unit can soar well above ground-up construction, especially when retrofitting older Class B and C buildings.

But the problem continues to be a lack of interest in outdated office properties. With the prolonged flight to quality, employers are flocking to top-tier, Class A properties with modern amenities, flexible layouts, and cutting-edge technology. This shift leaves older, less attractive buildings, many of which could be prime candidates for conversion, sitting vacant.

While this trend pushes up demand for higher-end spaces, it simultaneously deepens the crisis for outdated office stock, making conversions even more necessary but also more challenging.

Costly Complexities of Conversions

Many office buildings simply weren’t built to become apartments, with layouts not conducive to residential, limited natural light, and deep floor plates all adding complexity and cost. Combine that with permitting, zoning, and code compliance, and the ROI for affordable housing does not pencil.

For instance, the latest similar project started in Manhattan is a 26-story office building at 1730 Broadway, purchased by developer Yellowstone for $185.9 million. In order to turn the property into 422 residential units, it will cost an additional estimated $34.7 million.

High-end conversions are pushing well beyond that. Plumbing and HVAC alone can account for over 30% of total construction costs, especially when dealing with outdated infrastructure or insufficient access to natural light. On top of all this, developers are burdened by high interest rates.

And that’s all before the country gets slammed by proposed tariffs…

Tariffs May Trouble Conversions

The irony is that in many cases, the only way to make these conversions financially feasible is to scrap the affordability component altogether.

Despite the policy intent, most office-to-resi conversions that actually break ground end up as market-rate or luxury housing — missing the mark on solving the affordable housing crisis. Because office-to-resi conversions barely pencil out today — especially in high-cost urban cores. Now consider the latest projections for tariffs:

• 39.5% tariffs on Canadian lumber
• 20–25% tariffs on steel, aluminum, and key appliances
• Sticky domestic price hikes as U.S. manufacturers use tariffs as cover

Tariffs are projected to raise single-family home construction costs by $7,500 to $10,000, according to the AP. Now, imagine how that scales in a dense, multi-unit adaptive reuse project.

Conversions rely heavily on imported steel studs, soundproofing insulation, gypsum board, and fire-rated doors — a lot of which comes from Canada, Mexico, or China. If costs for these components rise or availability tightens, it’s not just a cost issue — it’s a compliance issue.

Not to mention that every residential conversion needs washers, dryers, HVAC mini-splits, and cooking appliances — many of which are sourced from Mexico or Asia.

Even if you can absorb the price bump, delays can hit the schedule. That’s money lost in interest carry, especially if rates stay sticky.

Labor costs are another pain point. Unlike ground-up construction, conversions often require specialized crews—electricians, plumbers, and structural engineers—who are in short supply nationwide. This inflates bids and delays timelines, further compounding cost overruns in a high-rate environment.

What is the Future of Conversions?

Simplifying zoning processes is a good start—but not great.

It clears the first hurdle but doesn’t address the real blockers: outdated building codes, punishing construction costs, and financing gaps.

You can greenlight a conversion on paper, but if the floorplates are too deep, the plumbing too outdated, or the code requirements too rigid, the project still won’t pencil—no matter how streamlined the approval process is.

Regardless, the push for conversions has gained serious momentum. Dozens of projects are already breaking ground across the country—in Manhattan, Boston, Seattle, and beyond—as cities bet big on adaptive reuse to solve two problems at once.

But the real test is still ahead. With tariffs looming and construction costs already sky-high, time will tell if this movement can scale… or stall under pressure.

Takeaways for Tenants

Cities are continuing to push for converting underused office buildings into housing as the office market faces sustained and record-high vacancies and falling tax revenues.

The hope of local governments is that tax abatements and streamlined rezoning will speed up office-to-residential conversions, especially for projects that include affordable housing. But the challenges for wide-scale implementation of adaptive reuse are formidable. Construction costs, new tariffs, and regulatory challenges could slow progress, but the momentum is clear.

So, in the future, corporate tenants should be wary that the landscape of available office space may shrink, potentially leading to less supply and higher rents for quality spaces in the long run. It also signals a shift in city priorities, with more focus on mixed-use, vibrant downtowns rather than traditional office corridors.

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