A potential home run for a triple-worth of housing problems
Housing, office buildings and retail are all under stress.
Published August 29 2025
Bottom Line
The US has a rare opportunity to address three major real estate challenges with a single strategic solution. The problems: the national housing shortage and lack of affordability; the growing vacancy rate of outdated office buildings; and the decline of suburban shopping malls. The solution: Commercial-to-residential conversions
National housing crisis The US housing market is under immense pressure, with a structural shortage estimated at 3.8 million units nationwide. This deficit stems from years of underbuilding following the 2008 financial crisis, compounded by restrictive zoning laws, rising construction costs and labor shortages. While new-home completions hit record levels in 2024, they remain insufficient to meet the surge in demand, particularly from millennial and Gen Z buyers entering their peak household formation years.
A key driver is pent-up household demand. Many young adults aged 18-44 have delayed forming independent households due to affordability constraints, choosing instead to live with family or rent with roommates. This trend diverges sharply from historical norms and signals a latent wave of demand that could be unleashed if housing becomes more accessible.
Due to elevated mortgage rates, record high home prices and inflation-impaired wages, housing affordability has deteriorated sharply, to the worst levels in 40 years. In 2025, only 21% of home listings were affordable to middle-income buyers, and just 8.7% were within reach for low-income households. Mortgage rates hovering around 6.8% have pushed monthly payments higher, pricing out many would-be buyers. Rental markets offer little relief, with vacancies at historic lows and rent growth outpacing wage gains.
New York State of Mind The crisis is particularly acute in high-productivity cities like New York, which faces a shortage of more than 400,000 units. These cities offer excellent career opportunities and economic mobility, but housing scarcity limits access. A study published in the American Economic Journal found that if housing supply was more flexible in these regions, US gross domestic product could be 3.7% higher. That is a staggering economic opportunity cost, affecting labor mobility, productivity and consumer spending. Without intervention, the gap between housing supply and demand likely will continue to widen, exacerbating inequality and slowing economic growth.
Shift in office demand The commercial office market is undergoing a structural transformation, driven by the widespread adoption of remote and hybrid work models in the aftermath of the Covid pandemic. While some companies are returning to in-person operations — the industry average is a three-day week in office — the demand for traditional office space (particularly for older, less-efficient buildings) has declined sharply. This has led to a growing divergence in performance between high-end Class A office properties and their older Class B/C counterparts. Most tenants prefer modern, amenity-rich spaces that support flexible work environments and employee well-being. As a result, Class A buildings in prime locations are seeing relatively stable occupancy and rent growth. In contrast, the other classifications are experiencing rising vacancy rates and falling valuations.
New York State of Mind II This troubling trend is especially pronounced in New York City. Data from real estate research firm Avison Young shows that availability rates for Class B/C office space remain well above pre-pandemic levels, while demand for Trophy and Class A space has rebounded more quickly. Many older buildings are now functionally obsolete -- too expensive to retrofit for modern needs and too outdated to attract tenants. This creates a clear opportunity for adaptive reuse. With large swaths of underutilized office space now empty, developers are increasingly exploring conversions to residential use, which addresses the housing shortage and revitalizes underperforming assets and struggling neighborhoods.
Meet me at the mall A parallel opportunity is emerging in suburban America, with the transformation of underperforming shopping malls into residential and mixed-use developments. With more than 34 million square feet of vacant retail space across the country, mall conversions offer a compelling solution to the housing shortage, particularly in areas where new construction is often constrained by zoning or infrastructure limitations.
America is 'overstored' The decline of traditional malls has been accelerated by the rise of e-commerce. It keeps growing, with the likes of Amazon Prime, continuing to change consumer preferences, and the consolidation of retail footprints. Many malls, especially those anchored by struggling department stores, have become financially unviable. However, their strategic locations — often near transit, schools and employment centers — make them ideal candidates for redevelopment.
Helping the situation are that local governments are increasingly supportive of these projects by easing zoning restrictions and offering incentives to encourage redevelopment. These conversions not only add housing supply but also revitalize communities, reduce urban sprawl, and create walkable, amenity-rich neighborhoods.
But this solution is not without challenges. Zoning changes are time-consuming, and retrofitting large retail spaces for residential use often requires significant structural modifications. Still, for developers and investors, mall conversions represent a long-term opportunity to unlock value from distressed assets and address a critical societal need.
Conversion feasibility and cost comparisons While the potential for commercial-to-residential conversion is compelling, its success hinges on feasibility, both structural and financial. Not all buildings are suitable for conversion. Ideal candidates are centrally located, near public transit and mostly or fully vacant. Buildings with deep floor plates, outdated layouts or long-term commercial leases often pose significant challenges, requiring costly redesigns or prolonged negotiations.
It’s all about the Benjamins From a financial standpoint, conversions are often more attractive than ground-up construction. In dense urban markets like Manhattan, the cost of building new multifamily housing can reach $700–$750 per square foot, with timelines stretching 3-5 years due to permitting, zoning, and construction delays. In contrast, conversions can be completed in half the time and at lower cost, especially when leveraging existing infrastructure.
A key driver of conversion economics is the purchase price gap between office and residential real estate. Class B/C office buildings are significantly cheaper per square foot than multifamily units, allowing developers to acquire assets at a discount and reposition them for higher returns. This arbitrage opportunity is particularly strong in cities with high housing demand and weak office occupancy.
New York State of Mind III Programs like New York’s 467-m tax incentive enhance financial viability. The program offers a 90% property tax exemption for 30 years to developers who convert commercial buildings into residential units, provided that 25% of the units are income-restricted and rent-stabilized. Studies from the NYC Comptroller’s office show that, even with reduced gross income from affordable units, the tax savings can significantly improve net operating income and project-level returns.
It will be difficult, but most things worth doing are Commercial-to-residential real estate conversions are a strategic response to resolve some of the most pressing economic and social challenges facing the US. By repurposing underutilized office buildings and shopping malls, developers can help close the housing gap, revitalize communities, and unlock long-term value from distressed assets.
Research assistance provided by Federated Hermes summer intern Devin Clancy
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