Elon Musk Isn't the Only One Fighting Regulators for Turning Offices Into Bedrooms

The rise of remote work has piqued developers' interest in converting empty downtown offices to apartments. Zoning codes and building regulations often make that impossible.

In an apparent effort to complete his bingo card of regulatory agencies he has feuds with, Elon Musk is now fighting with the San Francisco Department of Building Inspections (DBI).

The drama started Monday when Forbes reported that Musk-owned social media company Twitter had converted rooms in its San Francisco headquarters to sleeping quarters for use by weary employees. By Tuesday, DBI was confirming to reporters that it was investigating Twitter for building code violations.

"We need to make sure the building is being used as intended," Patrick Hannan, a spokesman for the department, said in an email to The Washington Post. "There are different building code requirements for residential buildings, including those being used for short-term stays. These codes make sure people are using spaces safely."

The inspection got some heated responses from Musk, who suggested the city spend less time policing Twitter's office space and more time preventing fentanyl overdoses.

So city of SF attacks companies providing beds for tired employees instead of making sure kids are safe from fentanyl. Where are your priorities @LondonBreed!?https://t.co/M7QJWP7u0N

— Elon Musk (@elonmusk) December 6, 2022

But San Francisco is hardly the only city that makes repurposing office space needlessly difficult.

Across the country, once-bustling central business districts are suffering a post-pandemic slump as downtown workers have switched to fully remote work or hybrid schedules. Office occupancy rates have fallen to half their pre-pandemic levels, according to data tracked by Kastle Systems.

At the same time, residential rents have returned to, or even exceeded, their pre-pandemic levels in most cities.

The dynamic is piquing developers' interest in repurposing empty offices for apartments.

A recent study from RentCafe found that there were 28,000 office-to-apartment conversions in 2020 and 2021. That's up from the years immediately before the pandemic. These conversions are also growing faster than new apartment construction.

But that still represents a small portion of the nearly 800,000 apartments built in the same period. Myriad regulations help prevent these conversions from being more common.

Building code provisions about light and air are among the most common hurdles, according to a new policy brief from Up for Growth. These codes will typically require that bedrooms come with windows that can open. That often can't be accommodated in office buildings with "deep" floor plans with lots of interior, windowless space. One solution is to install an atrium in the middle of the building. But those turn into dark tunnels after five stories and require giving up leasable square footage, notes the Up for Growth report.

Requirements about how close residential units have to be to a stairwell can also trip up the conversion of large, single-stairwell office buildings.

Offices often aren't zoned for residential use either. And getting a property rezoned is a long, expensive process with no guarantee that zoning officials will agree to the proposed use change. Even if they do, rezonings can trigger expensive additional requirements.

In Washington, D.C., for instance, rezoning a property from non-residential to residential use requires the developer to offer some units in the new building at below-market rates to lower-income residents.

These policy headwinds are in addition to practical and financial barriers to office-to-apartment conversions. Vacancy rates are up across offices, but few office buildings are totally empty. That means a developer would have to buy out existing tenants.

Office rents are also typically higher than residential rents, meaning demand for office space has to be really low and residential rents high to make the math work.

The aforementioned Up For Growth report found that in Denver, only 12 buildings, making up 6 percent of downtown office space, were suitable for apartment conversions. A report from Moody's Analytics in April dismissed office-to-apartment conversions as a passing fad.

On the flip side, major New York developer Silverstein Properties is trying to raise $1.5 billion from investors for office-to-apartment conversions.

Policy makers have also expressed an interest in scaling back regulations to ease these conversions.

New York Gov. Kathy Hochul included a preliminary proposal to give Manhattan developers more flexibility on light and air requirements in her budget proposal earlier this year. New York City Mayor Eric Adams has also endorsed the idea. A commission convened by Hochul and Adams is supposed to make recommendations on which rules need to change by the end of the year.

More heavy-handedly, U.S. Rep. Debbie Stabenow (D–Mich.) proposed subsidizing office-to-apartment conversions in exchange for making some of the units affordable.

None of this will help Musk or his employees looking to nap in comfort. The billionaire's fight with city regulators is a good reminder of how regulation has made downtowns so unadaptable.