A developer is proposing an office-to-residential conversion in Oakland in one of the first such projects for the city as California's Bay Area struggles with record high office vacancies and a persistent housing shortage.

The owner of a nearly 375,000-square-foot office building at 1000 Broadway in downtown Oakland is looking to adapt the top four floors of the building into an undisclosed number of apartment units. Studio T-Square architects filed the proposal with the city's planning department on behalf of the owner, Sparknight.

The proposal is among the first office-to-residential conversion plans in Oakland, according to CoStar research.

Office conversions are gaining national popularity as developers look to repurpose underutilized properties in the wake of the COVID-19 pandemic, though the higher costs associated with such projects has kept some developers from getting in on the action, according to CoStar research.

Sparknight, based in Orlando, Florida, acquired the office for an undisclosed price in 2010, according to CoStar data. The property is 67% vacant with current leases running through 2024 to 2026.

Downtown Oakland’s office vacancy rate hit an all-time high of 18.4% this year, up from 15.4% a year ago, according to CoStar data. The downtown area’s multifamily market has been comparatively stronger in recent years as renters sought out more affordable and less dense alternatives to San Francisco and San Jose, according to CoStar.

The city's apartment vacancy rate was halved to 9% since 2021, and investors are responding to demand with 1,800 units in the pipeline, about 20% more than the seven-year average.

In some cases, developers in Oakland and other Bay Area cities have been slow to tackle office conversions after not being able to make the projects pencil, according to John Gillem, director of market analytics at CoStar Group.

Oakland counts blocks of high rises with floor plans that are not optimal for multifamily buildings, Gillem notes. Converting the plumbing, hallways and lighting in such buildings is difficult, often resulting in a lot of unaccounted for “middle space,” according to Gillem.

“The best office to residential conversion candidates are often much older buildings with smaller footprints that can more easily accommodate hallways,” Gillem said.

Cost poses another headwind. It's sometimes more expensive to retrofit a building rather than building apartments from the ground up, with a CoStar analysis showing the typical hard costs of retrofitting range from $250,000 to $300,000 per unit. The average market price of a multifamily property was just under $250,000 per unit in 2023.

At the National Apartment Association’s recent Apartmentalize conference, one developer said they were able to convert an office into homes in downtown Wilmington, Delaware, because the sale worked out to just $7 per square foot. Another developer at the conference said his firm targets an acquisition cost no higher than $35 per square foot, or $35,000 per unit.

Office buildings are selling at a historic discount in Oakland, but it still is far above those figures, according to CoStar data, with the average property selling for $412 per square foot.

Cost and construction roadblocks make conversions challenging without local government incentives like tax breaks and expedited planning, according to Gillem. Oakland did not respond to requests to comment on potential conversion incentives in the city.

Neighboring San Francisco, however, is looking to add incentives of its own. A ballot in the recent California primary elections aims to waive the transfer tax for office transactions where a residential conversion is planned. San Francisco residents are split on the measure with some votes yet to be tallied, according to reports.

Cities like Oakland and San Francisco could lean on conversions to address vacancy concerns, according to Robert Sammons, senior research director at Cushman & Wakefield.

“When you see office vacancies around 30%, it’s going to be really difficult to fill all that space,” Sammons told CoStar News. “Some of these older buildings are going to come off the market, that’s a way to address availability.”