By Peter Grant

The long-beleaguered Washington, D.C., office market is emerging as one of the nation's hottest for converting outdated workspaces into new housing.

The district has more than 6,500 residential units in the pipeline that would result from planned conversions of old office buildings, according to data firm RentCafe. That puts Washington ahead of every other U.S. market, except New York City, for office-to-apartment transformations.

The recent surge in the district's conversions reflects the city's large stock of obsolete office buildings and generous government incentives that encourage the projects.

Now, developer Post Brothers is about to break ground on a $750 million conversion that the company says would be the largest ever office-to-residential project in Washington.

It would create about 530 rental apartments from two office buildings on Connecticut Avenue near Dupont Circle and adjoining the upscale Kalorama residential neighborhood, home to many political elites.

To make the numbers work, the project is relying on the largest loan ever made under a financing program that treats energy and building-system upgrades as a kind of property tax rather than a standard loan.

This financing tool enabled Post Brothers to get construction financing after the largest banks couldn't reach a deal, according to Post Brothers President Matt Pestronk.

"For conversions of this size, that's becoming increasingly important," he said.

Conversions in Washington are part of a broader national push after the pandemic suffocated office demand. With vacancies climbing and housing shortages worsening, cities began looking to the conversions as a way of addressing both issues.

Still, the transition has been slower and harder than many early advocates expected. Conversions often run into financing gaps, design constraints that limit light and air, and rental markets that don't always support the high costs of reworking older buildings. Many obsolete office buildings simply wouldn't work as conversions and are more likely candidates for demolition.

The pace has begun to pick up, however, as architects devise new hacks and developers are able to acquire more old buildings at cheaper prices. That is especially true for Manhattan, but also Chicago, Dallas and Los Angeles. More than 70,000 conversion units were in the pipeline nationwide, more than three times the number in 2022, RentCafe said last year.

Washington became a leader largely because of the severity of its office downturn. The federal government's return-to-office efforts were far weaker than those in the private sector, leaving vacancy rates stubbornly high across downtown.

Washington Mayor Muriel Bowser began taking concrete steps well before many peer cities. "Once it was clear that federal office demand wasn't going to snap back, the mayor moved to put incentives and zoning changes in place," said District Deputy Mayor Nina Albert.

But the city's pivot toward conversions proved tricky amid a shifting political climate. Uncertainty over the scale of federal cutbacks during the second Trump administration injected additional risk into an already fragile downtown recovery.

The economic drag from federal spending cuts is also unmistakable. Last year, district officials projected that federal employment in Washington could decline by roughly 40,000 jobs over the next three years.

Now, city efforts to expand the economic base into technology, healthcare and education are reinforcing the view that demand for downtown housing will stay healthy even as the federal footprint shrinks.

"The broader economy remained stronger than many expected," Pestronk said.

Philadelphia-based Post Brothers, which bought office buildings in the district for conversions, hit numerous bumps as it navigated Washington's volatile economy. Last year, as uncertainty over federal budget cuts froze the lending market, the firm lost one of the buildings, 2100 M Street, in a foreclosure action.

Post emptied out the Connecticut Avenue buildings after buying them in 2022. But Pestronk said it took Post 18 months longer than expected to put together a financing package for its conversion there, even though the property was "the best piece of real estate we ever owned."

Just a few blocks away, single-family homes start at around $3 million, underscoring the strength of the neighborhood's housing market. But even the property's prime location failed to overcome lenders unease with the district's economy.

One deal fell apart even though the project qualified for a 20-year tax abatement under a district program designed to encourage conversions. "It was horrible," Pestronk said.

In December, Post Brothers closed on a $110 million first mortgage from Mavik Capital Management and a $465 million loan from Nuveen Green Capital under the Commercial Property Assessed Clean Energy, or C-PACE, program, said Vik Uppal, Mavik chief executive.

States and local governments began permitting C-PACE financing as property-tax--like assessments to encourage energy efficiency, renewable power and building resilience. Typically, when a C-PACE loan is made to a property owner, the local taxing authority records a special assessment against the property that is similar to how sewer assessments are recorded. The assessment is on the property; the owner is required to repay it.

Nearly all office-to-residential conversions might qualify for the financing because they involve major system upgrades -- such as heating, cooling and windows -- and because reusing buildings avoids the carbon costs of demolition.

"We think this is just the beginning, not just in Washington, but in cities across the country," said Alexandra Cooley, CEO of Nuveen Green.

Write to Peter Grant at peter.grant@wsj.com

(END) Dow Jones Newswires

January 06, 2026 12:00 ET (17:00 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.