Why brokers should prepare for these complex CRE projects
The commercial real estate office sector was among the hardest hit during the COVID-19 pandemic, and its recovery has been slow.
The process was accelerated slightly in 2025, as more corporations began requiring employees to return to the office after a surge in work-from-home positions in the immediate aftermath of the pandemic.
However, even as more workers return to daily commutes, some office buildings remain empty, awaiting their fate. One economist believes that we’ll continue to see an increase in office conversions, but the growth in those conversions may take some time.
Xander Snyder (pictured top), senior commercial real estate economist for First American, said it’s important for CRE brokers to understand the unique challenges of office conversions and how they differ from the new construction market.
“Office conversions aren’t like ground-up office construction,” Snyder told Mortgage Professional America. “There’s no standard playbook, costs are less predictable, and underwriting hinges on the stabilized end-use value, which is more difficult to estimate, rather than its ‘as-is’ value.”
More hands-on process
Because there is no standard playbook for office conversions, mortgage brokers often face a more complex transaction than a standard ground-up construction.
“That forces mortgage brokers to be more hands-on, stitching together a custom capital stack, often including bridge and mezzanine debt, sometimes layered with C-PACE financing and tax credits,” Snyder said. “It also puts brokers in a pseudo-diplomatic role, managing multiple lenders with different priorities within a more complicated financing structure.”
This often results in brokers wearing multiple hats during an office conversion deal. Snyder said those brokers who can handle the complexity of this type of transaction have a big advantage over other commercial brokers.
“In that sense, when financing conversions, brokers must act less like typical conduits for a single loan and more like problem solvers engineering a full financial solution,” he said. “Borrowers financing conversions usually must pay more for this flexibility, but when a building is a true conversion candidate and the value spread is real, conversions can still offer a faster path to completion and solid returns than new construction.
“Brokers who can navigate this complexity will have a real edge as conversion activity grows, but it requires creative thinking and a deep network of non-conventional lenders.”
Office market still struggling
Despite return-to-work mandates and office conversion projects, the office sector continues to struggle overall. However, Snyder said there are some positive signs in the space in 2025 that will hopefully carry over into 2026.
“Nationally, office net absorption turned positive in the second half of 2025, the first time since the second half of 2021, and before then, since pre-pandemic,” Snyder said. “This is an encouraging sign that, at today’s effective rents and concessions, some leasing demand is returning, though it remains uneven and skewed toward higher-quality buildings.
“As a result, the national office vacancy rate appears to be stabilizing near 14 percent. At the same time, delinquency rates for office loans remain high, and workout strategies for distressed properties could continue to weigh on leasing dynamics.”
According to Snyder, only 52 million square feet out of the 7.9 billion square feet of office inventory available at the beginning of 2020 has been converted over the last five years. This is just a 0.7% reduction in inventory through conversion. However, he expects a surge in conversions once the current pipeline of new office construction projects empties.
“I think conversions are more likely to start impacting office supply in 2027, not this year, as the construction pipeline continues to shrink and conversion activity grows,” he said. “In downtown corridors where conversions represent a meaningful share of existing stock, that reduction in office square footage could be enough to meaningfully tighten the local leasing market.”
For brokers looking for the best opportunities for clients to tackle an office construction, older buildings that can be acquired at a discount make the most sense. However, Snyder notes that if the older building inventory sees higher demand, prices could rise, which could limit future conversions.
“Many of the best conversion candidates are older Class B/C buildings, while today’s strongest demand is for Class A and A+,” Snyder said. “So it’s not a clean comparison when thinking about impact on rents and prices. Since conversions require a wide margin for error to account for unexpected costs, a meaningful increase in Class B/C pricing would likely dampen conversion activity.”
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