Office-To-Residential Conversions In Chicago's Loop Without Public Subsidy
In Q4 2025, Chicago’s central business district reached a critical juncture that is equal parts existential threat and material opportunity. The office market in the Central Loop is in serious distress, with vacancy rates reaching an all-time high of 28%, coupled with capital stack angst.
Jennifer Schultz, Nixon Peabody partner and leader of its real estate development team, who oversees conversion projects in the Chicago area, said demand for residential living downtown is growing. At the same time, the vacancy rates in downtown office buildings are creating newly available physical space that can be reused to satisfy this need.
“The city began to recognize this dichotomous scenario in 2022, when it first introduced the LaSalle Reimagined Initiative within the CBD to make available significant government financing for office-to-residential conversions,” Schultz said. “As of October 2025, this program has already approved $260M in tax increment financing covering five projects that will collectively advance the conversion of 1,765 new housing units, representing over $900M in total investment.”
Schultz and a multidisciplinary group of experienced development professionals in Chicago have collaborated on three case studies of distressed CBD office buildings, which, according to the group, could make excellent conversion candidates without city subsidy.
Bisnow spoke with Schultz and her collaborators from Gensler, AECOM Hunt, AECOM Tishman and Colliers office and multifamily advisories to discuss their approach, analyses and conclusions.
Bisnow: What makes a good conversion candidate?
Schultz: We look for a market with an established and significantly reduced reset in basis for office. Then, we take a look at buildings with at least one form of material financial distress, such as high vacancy, loan default/receivership/foreclosure or investor pressure. Third, we check for building footprints preferably below 25K SF in either a rectilinear or C or E shape. Lastly, we look for a neighborhood that includes a residential draw but also has capacity for hundreds of new units.
In the CBD, since Covid-19, most Class-B and C, and even some Class-A office buildings have established a retrade value of approximately 74% of their pre-Covid valuations. Resetting the basis is such a critical element of making a conversion pencil, and, unsurprisingly, it’s a lot better to be the new buyer at the low value than the seller stuck in distress looking for a pivot, or even a lender’s real estate owned group struggling with involuntary ownership of upside-down properties.
Bisnow: What makes a conversion not viable?
Schultz: The study of an office building for conversion often begins and ends with the building’s value. Apart from the financials, there are certain structural elements of buildings that, coupled with local regulations, can also break the bank and kill a project.
We see this often when a conversion is forced — by regulation — to alter the façade, such as the introduction of operable windows. Additionally, this occurs when the conversion design itself doesn't require a budget-busting change.
One other problem we see all over the country is local municipalities’ regulations regarding mandatory affordable housing for all residential projects. Given that office conversions are beginning from a place of distress — and, at the same time, provide a significant solution to another distressed scenario, like the housing shortage — conversions are more likely to be successful where mandatory affordable units are either eliminated or are coupled with significant tax breaks or government subsidy.
Bisnow: How did you select your case studies?
Schultz: We began by selecting 30 properties in the CBD with known financial distress and excluded anything above a 25K SF floor plate. We then put our heads together, looking at the legal/regulatory, design, engineering and construction costs, and financial underwriting for residential exit. We talked through each candidate at length, weighing both objective and subjective elements. We even asked each other, “Would you live there?”
We narrowed our choices down from 30 to 13, initially thinking we needed candidates located in the LaSalle Reimagined zone to qualify for tax incremental financing. Ultimately, we thought the best buildings, with the right distress, building form and location, were all outside this zone. We agreed to pivot our approach and design only zoning-compliant conversions that would not trigger the city’s mandatory affordable housing obligations.
Bisnow: Can you walk us through the studies?
Schultz: We can start with 332 S. Michigan Ave.
We all really liked this building. It’s across from the parks, with unobstructed views of the lake, in a perimeter location that already houses some higher-end residential properties. This building also screams out for historic tax credits, given its 1910 age and architectural elements. In light of these facts, and the surprise C-shape of the building, Gensler was able to design a 63% to 69% efficiency on the lower floors that shared a party wall, and 80% efficiency on the upper floors, totaling 350 new units. AECOM priced building upgrades and finishes at the high end of market-rate housing. The table below, with a historic tax credit, shows that this conversion plan proves an 8.79% yield on cost, and the building is currently in receivership, giving a new buyer an opportunity to come in at a low reset basis with a plan that pencils.
Next is 20 S. Clark St.
This one included more internal debate on our team: Do people really want to live this deep into the CBD?
Our thesis is that by being adjacent to JPMorgan Chase’s Midwest headquarters and just two blocks away from the houses of city government and Google’s Thompson Center, this location is where downtown workers will want to live. We modeled it as attainable housing — heavily weighted towards studios and one bedrooms, with rents more squarely in the lower-to-middle market rate ranges. Because we needed to avoid triggering the Affordable Requirements Ordinance, we were held to a maximum of 252 residential units, with 200 hotel keys to avoid tripping the Minimum Lot Area per dwelling unit, or MLA. As you can see below, the hospitality partial conversion carries the residential piece financially but together shows a 10.51% yield on cost.
Finally, we had 300 S. Wacker Drive.
As a group, we were uniformly enthusiastic about this building. With nearly 50% vacancy and a mid-rise mechanical stack, this building is well laid out for a partial upper-floors conversion. Additionally, the riverfront location allowed for a higher-end design plan and higher rents. This building last sold in 2017 for $155M but then passed through a deed in lieu of foreclosure in early 2024, thus shrouding the current written-down value determined by the real estate owned lender. For our case study, we applied the average 74% reduced value to our modeling to remain consistent with the established distressed office market.
Without any subsidy or tax credit, assuming a 74% reduction, we were able to prove out a 7.12% YOC, but then we talked to the city. It suggested that the building, being 50 years old, plus the map mural facing the river, could potentially qualify for landmarked/national registry status. This would allow us to bring historic tax credits into our model and would potentially bypass the MLA unit cap while retaining an all market-rate building for a full building conversion. The results were impressive:
Bisnow: What are your takeaways?
Schultz: Chicago is ripe with opportunities for excellent office-to-residential conversions. The city is a willing partner, the distressed office market has an established 74% average reduction in value, and people want to move downtown.
This article was produced in collaboration between Studio B and Nixon Peabody. Bisnow news staff was not involved in the production of this content.
Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.
