Conversion Projects Will Pick Back Up Next Year — As Long As Virtually Everything Changes

Hopes are high that projects to convert defunct or underperforming malls and office buildings to alternative uses will start again next year.

But a lot of things will need to line up between now and then.

“We need [interest] rates to go down, employment to go up, rents to go up and construction costs to come down,” said Colin Cannata, executive vice president on CBRE’s Central Texas multifamily team. “So all we need is all four of those things to be in our favor.” 

Cannata and other panelists at a National Association of Real Estate Editors conference session in Austin, Texas, set their sights on June 2025 as the time when a slew of new conversion projects could get financed and put under construction. That’s an educated guess, though, and panelists agreed that because these projects are not profitable they won't happen until something changes in the financial environment.

It’s tough in general to make the numbers work for conversions, Cannata said. CBRE has had four or five groups tour an Austin office building for potential reuse, and although demolishing the building would likely cost “double digits, into the millions,” it still makes more financial sense to take the building down than try to rehab it, he said.

A lot of dominoes have to fall perfectly for a conversion project to pencil, said Eric Hudson, principal and partner for Texas-based Method Architecture. Most floor plates are too large to allow natural light for residences, he said. Residential buildings also have different HVAC and plumbing demands so they could require new systems.

“Adding all of that stuff, the cost just piles up and it becomes really hard,” even in the best of financial times, Hudson said.

And these are not the best of times. Thomas Cox, founder and managing principal of California-based TCA Architects, said his firm has a half-dozen office-to-residential conversions under its belt.

But none were completed in today’s market. TCA has looked at about a dozen potential conversion projects in the past year, and it’s likely that none of them will go forward given the current climate, Cox said. 

That’s not due to “not in my backyard,” or NIMBY, attitudes. TCA generally sees more YIMBY than NIMBY around its conversion projects, suggesting public sentiment is in favor of repurposing obsolete buildings, Cox said.

“We don't like the decrepit, failing properties that they used to use and they can’t use anymore … a lot of these things are blights to the community and nobody wants that,” he said. 

Obsolete office buildings have been spotlighted since the start of the pandemic, but developers are increasingly eyeing shopping malls as redevelopment opportunities. Netflix this week announced plans to open an immersive experience at the former site of Belk department store at Galleria Dallas. Netflix has unveiled similar plans at the King of Prussia mall in Pennsylvania.

There are about 1,150 malls in the U.S. today, down from over 25,000 in the 1980s. Some projections say there will only be 150 malls left operating by 2032. 

Malls are not the hangout spots they were in decades past, Cox said, adding that the buildings were like fortresses, or a “big wall against the community.”

Redeveloping large indoor shopping centers often entails replacing the roof to make it more light, airy and welcoming.

Mall conversions should be built so people “don't feel like they're living in a mall, they feel like brand new experiences,” said Kevin Kessinger, president and chief operating officer of Trademark Property Co.

Communities take especially kindly to mall redevelopment projects that will bring new residents, he said, adding industrial and warehouse uses can also be appropriate in some cases. 

But that doesn't solve the issues blocking more projects from moving forward.

Construction costs rarely actually drop, though they may level out a bit as demand drops due to a lack of starts, Hudson said. Like all other developments, panelists said conversion projects need interest rates and the cost of building to fall before they can start to make sound financial sense. 

Panelists also called for cities to create tax breaks or ordinances to encourage adaptive reuse. And above all, investors must have a special interest in converting a building to get involved in the first place, Hudson said. 

“Creative solutions to making these conversions is going to be the key,” Cox said. 

Some are scared to jump due to the upcoming election, he said, adding that he expects markets to free up once that's settled.  

“We’re looking at the beginning of next year before any substantial changes happen,” Cox said. “Construction and new projects will probably be entitled and ready to go by, I’m thinking, June of next year. That’s going to be the ‘break loose’ moment.”