BAM Key Details:
- The U.S. has an office/commercial building crisis, and, by all appearances, we’re in the early stages.
- It’s worse In big cities like NYC where companies occupying huge office buildings are waiting for their leases to run out, with no intention of renewing them.
- While many have suggested converting office buildings for residential use, a building developer on Bloomberg offered three compelling reasons why this solution is more complex—and expensive—than it may appear.
Cities across the U.S. are faced with both empty office buildings and a shortage of housing supply. It’s worse in bigger cities like NYC, where many of their office buildings are vacant, and companies are waiting for their leases to run out, with zero intention of renewing.
So, there’s been a lot of talk, lately, about converting those empty office buildings into residential developments. But it’s not as simple as replacing cubicles with living room furniture. Turns out, a LOT goes into converting an office building into something people can live in.
And there are three significant obstacles to contend with.
On last Friday’s episode of the Hot Sheet, Byron Lazine drew our attention to a Bloomberg article, sharing why the idea of converting empty office buildings into residential space probably won’t end housing shortage issues. The costs associated with conversion are enough to make most developers stop in their tracks.
Plus, as Byron pointed out, “If you can’t get people to come into the office, how are you gonna get them to live in the office?” I mean, the lighting alone….
Let’s take a look at three reasons converting office space is more of a challenge than many expect.
Straight from the developer’s mouth
In the latest episode of Bloomberg’s Odd Lots Podcast, “What It Really Takes to Convert an Office Building Into Apartments,” Joey Chilelli, managing director at the Vanbarton Group, explains the challenges involved in converting office space to living space.
Even prior to the pandemic, Vanbarton was converting old offices into apartments. But while, on its face, it sounds like a perfect solution to the twin problem of empty office buildings and the lack of housing supply, developers assessing office buildings for conversion run into multiple issues that can easily make a conversion project more costly than it’s worth.
In fact, that seems to be the rule rather than the exception—at least when it comes to converting these spaces into affordable housing.
#1—Zoning restrictions
The first hurdle to jump in “office-to-resi” conversions would be the zoning restrictions, which dictate the use of a particular area (i.e. zone) of the city. Zoning restrictions in residential areas can even limit the number of homes that can be added by establishing a minimum lot size.
In commercial areas, the priority is on commercial construction and rehabilitation. So, in order to convert commercial spaces into residential ones, zoning restrictions would need to change.
In some cities, like NYC, local policymakers determined to increase housing supply may be more than happy to change them.
A place like New York, where they’re gonna lose so much tax money, I think they would flip the zoning restrictions because they’re already losing migration. Outbound migration is greater than inbound migration in New York City. Twenty percent of the revenue in New York City is tied to these commercial buildings. So, if they had to flip the zoning restrictions, they would.
#2—Structural complexity
Even without the issue of zoning restrictions, developers with a trained eye can easily spot structural issues that make a conversion project a huge, expensive headache:
- Ceiling height—Are they above 8 feet?
- Lighting—Is there enough access to natural light? And what changes would need to be made to the standard indoor lighting?
- Plumbing—Does it need to be reorganized or replaced?
- Electrical—Does it need to be rerouted or replaced?
- Structural integrity—How much steel will need to be added to reinforce the structure for residential use?
Steel, carving out residences, plumbing, ceiling height, all of these things, electrical, cost big money! Which means that these properties that are being converted into residential living are going to be what? Luxury. What do we have too much of already? Luxury. The new homes being built are at an average $550,000 price point. We already have a glut of multifamily coming on in Q3 and Q4. That’s what most of it is: luxury price point. Guess what we need in this country. We need, according to Zillow, over four million—according to other numbers, between two and seven million—affordable units. Not more luxury.
#3—High project cost
The expense involved in doing the work can easily drive up the cost of each apartment to $1,000 per square foot. So, for a unit with 1,800–1,900 square feet, you’re looking at close to $2 million for the price point. The average base salary in NYC is $87,000.
All this to say these units won’t make even the tiniest dent in the lack of affordable housing supply—in New York City or anywhere else.
I don’t see this being viable. I’ve been saying this for a long time, and there’s one developer, finally, in Bloomberg, saying the same thing.
Takeaways for real estate agents
So, what’s left to do with all the empty office space?
Barring the extreme option of requiring people to go back to the office, or providing a financial incentive to do so, it seems likely these buildings will remain vacant for the foreseeable future—unless we can find a better use for them that doesn’t require cost-prohibitive alterations.
On the Tuesday, July 11th episode of the Hot Sheet, Byron Lazine highlighted a decision by Boston major Michelle Wu to incentivize downtown office owners, offering them a tax break of up to 75% over a 29-year period for downtown office owners who convert their properties into apartments or condos.
Here’s hoping more local policymakers follow suit.
