At current valuations, office properties are still too expensive to be viable candidates for conversion into residential properties in most cases, according to a new report by Goldman Sachs.

For many U.S. metro areas impacted by remote work trends, such as the Bay Area, Seattle and Austin, the cost of acquiring an office building would have to be half of what it is now, Goldman said. The report further suggests that properties will continue to drag along as underutilized office buildings.

Before the pandemic, only about 0.4% of office space was converted into apartments. In 2023, that figure had only inched up to 0.5% as the process faced not only acquisition costs but also high interest rates and elevated construction costs, according to the report.

Goldman Sachs predicts that percentage will rise to 0.7% over the next four years. This will produce only about 20,000 new apartment units nationwide. The country needs as many as 4.2 million units to keep up with demand, according to a National Multifamily Housing Council estimate.

The difficulty of conversion comes in spite of the fact that around 4% of U.S. office buildings might not be viable as offices anymore. Such properties are in both CBDs and the suburbs and are typically more than 30 years old, not renovated since 2000 and currently carrying vacancy rates above 30%, Goldman Sachs reports.

“The average transaction price of these offices has declined by 11% since 2019,” the report notes. “In the hardest-hit cities, as many as 14% to 16% of offices may no longer be viable by our definition, and their average transaction prices have already fallen by 15% to 35% since 2019.”

Even so, the declines aren't enough. “Current acquisition costs for struggling offices are still too high for conversion to a multifamily building to be financially feasible,” explains the report.