From Empty Offices to Needed Homes, A Credit Opportunity Emerges

Article by Brookfield (2026) | Underwriting, Financing, Capital Stack

Curator: Alexandra Faciu

Montréal, Canada

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Why we recommend it: Brookfield’s analysis released earlier this year underscores why today’s environment presents such a compelling opportunity for conversion‑focused credit strategies. A rare convergence of sharply discounted office valuations and surging housing demand allows lenders to enter high‑quality urban assets at attractive bases while benefiting from strong, durable renter demand. With only a small subset of buildings truly viable for conversion, returns remain elevated for lenders able to underwrite complexity. Combined with growing municipal incentives and faster delivery timelines, the opportunity offers compelling risk‑adjusted yields in today’s market.

Key takeaways:

- A structural mismatch is reshaping U.S. real estate: millions of square feet of obsolete office space sit vacant while demand for housing intensifies. This divergence is creating a selective but compelling credit opportunity for lenders capable of underwriting complex office‑to‑residential conversions.

- Nationwide office vacancy rates have doubled since the pandemic, with the lowest‑quality 30% of buildings responsible for nearly 90% of empty space. These assets, often more than 50 years old, were built for a workplace model that no longer exists. In contrast, the housing market faces severe undersupply. Homeownership costs have risen far faster than incomes, and the U.S. is short roughly 3 million homes. Population and household formation are expected to continue rising through 2029, further tightening supply. This widening gap between unused offices and needed housing is accelerating interest in conversions, especially in high‑cost, supply‑constrained cities.

- However, the universe of viable conversion candidates is far narrower than the volume of aging offices suggests. Roughly half of lower‑grade buildings are immediately ruled out due to weak local demand, zoning barriers, or inefficient floor plates. Of the remainder, most fail to pencil out economically without public incentives. Ultimately, fewer than 1% of U.S. office buildings, about 7,000 properties, meet the combined criteria of location, design feasibility, and economic viability. This scarcity has kept the field in the hands of experienced specialists, though improving policy support is gradually expanding the pool.

- Cities are increasingly stepping in to unlock feasibility. New York’s “City of Yes for Housing Opportunity” initiative represents the most comprehensive model, combining zoning reform, expanded eligibility, and multi‑decade tax abatements to support as many as 80,000 new homes. Other cities, including Washington, D.C., Boston, and Los Angeles, are pursuing similar, though more limited, programs. As these incentives grow, they help offset construction costs and extend viability beyond only the highest‑rent markets.

- For credit investors, the opportunity is particularly attractive. Office valuations remain roughly 40% below 2022 levels, enabling lenders to enter at reset prices. Because few lenders possess the technical capability to underwrite conversion risk, return premiums remain elevated even for well‑located projects. Unlike equity investors, lenders are not dependent on long‑term rent growth; they are primarily compensated for completion and stabilization risk. Conversions also typically deliver faster timelines than ground‑up development, often by 12 to 24 months, accelerating repayment and enhancing downside protection.

- Selectivity remains essential. Successful projects typically involve buildings large enough to achieve construction efficiencies but small enough to lease quickly; locations with established residential amenities; efficient floor plates that maximize rentable units; and experienced sponsors with institutional‑grade execution capabilities. Strong equity contributions further align incentives and protect the debt position.

- Developers, in turn, seek financing partners with integrated expertise across office and residential assets, the ability to move quickly from approval to closing, and the scale to finance entire projects. For well‑capitalized credit platforms with development insight, this emerging niche offers a chance to deploy capital into high‑demand urban housing while capturing attractive, risk‑adjusted returns.

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