423. The Office-to-Resi Conversion Boom is Just Getting Started with Joey Chilelli, Vanbarton Group

The podcast features Haley Keen and Lonnie Hendry from TREP interviewing Joey Chilelli, partner at Vanbarton Group, about office-to-residential conversion opportunities. Chilelli begins by sharing his background in commercial real estate, starting in construction and pursuing formal education in finance and real estate development before joining Vanbarton in 2016.

The discussion opens with an analysis of the current office market condition. Chilelli characterizes it as a structural rather than cyclical disruption, marked by a clear bifurcation between Class A premium office spaces in prime locations (such as Grand Central in New York) which perform strongly, and Class B/C spaces that underperform significantly. He notes that while back-to-office initiatives show promise, tenants are using space differently post-pandemic, requiring smaller footprints and better amenities. He predicts that as Class A rents reach premium levels, some tenants will accept Class A or B+ alternatives on the periphery, which will gradually backfill secondary markets.

Regarding total office inventory conversion, Chilelli contextualizes the discussion at a sub-market level, using Grand Central (40-45 million square feet) as an example where approximately 4-4.5 million square feet (roughly 10%) is being converted to residential. He emphasizes that while 10% appears small nationally, it's substantial locally and meaningfully addresses housing demand.

Vanbarton's conversion strategy predates the pandemic boom, beginning in 2011 with special situations and one-off opportunities driven by financial district office vacancies and debt maturities. Post-pandemic, the opportunity set has expanded dramatically due to multiple factors: policy changes like New York's 'City of Yes' and the 467M tax incentive program, increased lender participation and understanding, improved economics from higher residential rents, and recognition of the mixed-use urban lifestyle demand.

On underwriting fundamentals, Chilelli identifies acquisition basis as primary but emphasizes the importance of existing tenant leases, occupancy levels, and lease termination options. The key metric is all-in cost per unit, typically ranging from $650,000 to $900,000 depending on sub-market and neighborhood. Conversions offer significant time advantages—18-24 months from acquisition to first resident move-in versus 4-6 years for ground-up development, reducing project risk substantially. Financing has become more accessible, with dozens of lenders now competing in the space compared to a handful pre-pandemic.

On tenant experience, Vanbarton's explicit goal is for residents to be unaware the building was formerly office space. They achieve this through meticulous attention to finish quality, amenity programming, and detail curation (including testing furniture in-house). High renewal rates (60%+) and displacement of residents from competing ground-up buildings indicate success in meeting or exceeding conventional residential standards.

Regarding building characteristics, while certain floor plates (four-sided light exposure, 12,000 square feet) are more conducive to conversion, Chilelli argues nearly any building can be converted with creative design solutions (facade peeling, balcony creation, blind shafts, courtyards) if the acquisition basis supports the required modifications.

Vanbarton maintains a diversified investment strategy across office, multifamily, retail, and hospitality, with conversions representing a growing but integrated component. Asset managers who work across multiple property types bring valuable perspective to conversion projects since many operate as office buildings during tenant occupancy before transitioning to development and multifamily leasing.

Looking forward five years, Chilelli believes office-to-residential conversions will transition from trend to permanent market fixture. While not a complete solution to housing crises, these conversions will produce meaningful residential units and create catalytic effects for retail and office redevelopment in neighborhoods. He anticipates robust pipeline activity and long-term sustainability of the strategy.