Conversion from office space to apartments is getting harder. Let’s discuss why, and also what the effort is really all about. 
Only 3,575 apartment units were converted from office space last year. The already fraught process now faces even more challenges.
The Wall Street Journal explains why in its report Turning Empty Offices Into Apartments Is Getting Even Harder
Cities hoping to convert emptying office buildings into apartments are running into financing issues, stagnating rental markets and other challenges that are bottling up their efforts.
Developers last year created just 3,575 apartment units in the U.S. through office conversions, according to an analysis by rental listing site RentCafe. That amounts to less than 1% of all apartments built that year through new construction.
Federal and local governments are also trying to give conversions a boost. The White House said last month that it was updating guidance for existing grants and spending programs to make billions in federal dollars available for these projects. It also said it would seek the conversion of more government-owned properties into housing.
Some cities, such as Washington, D.C., New York and San Francisco, are also taking steps to encourage more conversions. Tax incentives and faster approvals are “rocket fuel” for these projects, said Sheila Botting, a principal at commercial property brokerage Avison Young.
Even so, the process has always been fraught with difficulty and few office buildings are natural candidates. Conversions are easiest in older, lower-quality and mostly empty buildings with small floors. But less than 1% of office space in the biggest U.S. cities ticks those boxes, according to Avison Young.
In significant ways, the conversion process is getting even harder now. Slowing rent growth might make apartment conversions less attractive to investors, if the trend persists into next year. Asking rents for apartments have fallen 1.2% nationally over the past 12 months, according to rentals website Apartment List.
Projects Not Economical
Without massive subsidies these projects are not economically feasible. Many aren’t even with massive subsidies.
In downtown Dallas, developer Wolfe Investments seeks to convert an 18-story, 1950s office tower into residential apartments, but has recently been fighting off foreclosure from its lender, Thistle Creek Partners, court records show.
Developers of One Camelback, a 200,000-square-foot office building in central Phoenix, are trying to convert it into what would be one of the city’s most expensive rental-apartment properties. A website advertises $8,000-a-month apartments, with floor-to-ceiling windows and crystal-clear views of nearby mountains.
But the developers, Sagamore Capital and partners defaulted on a loan of about $70 million. The project’s lender, Delphi Financial Group, has moved to foreclose. An auction of One Camelback is set for later this month, according to documents filed in Maricopa County, Ariz.
Biden Throws $45 Billion in Federal Funds to Convert Offices into Homes
On October 29, I commented Biden Throws $45 Billion in Federal Funds to Convert Offices into Homes
Questions abound. Assume you can convert offices into homes, who wants to live in them? Is a tear down cheaper?
The government has 1,500 office buildings nationally and leases on almost 200 million square feet of additional space that it does not need. Instead of canceling leases and selling the real estate, it’s going to convert them into clean energy spaces.
With enough subsidies, developers will try nearly anything. Then when the projects fail, the developers ask for more money.
How is this Being Paid For?
Taxpayers of course. But Biden is funneling $45 billion from clean energy incentives in the ridiculously named Inflation Reduction Act (IRA) into housing conversions.
You might also be wondering what this has to do with clean energy, and the answer is nothing. The questions keep piling up and I have answers.
What’s Really Going On Here?
Biden is hoping to spread the IRA dollars around to buy more votes.
But to do so, he is taking money away from his other pet projects to fund the idea of the moment. His idea of the moment is to do something about the price of rent.
Biden Trails Trump in Five of Six Battleground States
Polls say Biden is in serious trouble and those polls are very believable for reasons I explain.
For discussion, please see Five Alarm Bell – Biden Trails Trump in Five of Six Battleground States
One of the more amusing stats in the poll is voters under 30 favor Mr. Biden by only a single percentage point. And a majority of voters saying Mr. Biden’s policies have personally hurt them.
Housing helps explain that.
CPI Rises More Than Expected as Rent Jumps Another 0.6 Percent
I repeat the core key theme for something like two years now. People keep telling me rents are falling, I keep doubting.
The doubters have it correct again.
On October 12, I noted CPI Rises More Than Expected as Rent Jumps Another 0.6 Percent
Rent of primary residence, the cost that best equates to the rent people pay, jumped 0.6 percent. Rent of primary residence has gone up at least 0.4 percent for 26 consecutive months!
Supposedly, the price of new leases is declining. But new leases are a small slice of the market. Most people do not move. And the irony is falling prices on new leases makes these conversions increasingly unfeasible without bigger and bigger subsidies.
It is not the wealthy who make up the majority of renters. So rent alone is fueling the pain that shows up in the polls. Factor in food.
A rising stock market and home prices does not help those with no assets. And the poor have no assets.
So Biden is desperate to do something about rent. His funneling of $45 billion from here to there is part of his solution.
He may very well be caught in a Red Queen Race where the more he tries the worse he looks.
Wake Up Mr. President, Consumers Do Not Want Not EVs
On October 16, I commented Wake Up Mr. President, Consumers Want Hybrids, Not EVs
A better title would have been Wake Up Mr. President, Consumers Don’t Want EVs
While the President harps about how great things are, consumers don’t see it that away and I have been covering all the reasons why.
This office to apartment idea is nothing more than throwing money at failed big cities hoping to buy more votes. Since consumers don’t want EV’s Biden’s plan is to quietly shift the spotlight to rent.
Unfortunately for Biden, $45 billion does not buy as many votes as it used to.
Obviously they need to hire squatters from Scandinavia as experienced consultants.
Side note: Never discount the advantages of an insurance fire.
Speaking of non-marketable real estate, WeWork just filed for bankruptcy.
All those abandoned malls, stores, and banks would make dandy homeless shelters.
Steve,
Do you own real estate? I do and can tell you from experience converting this stuff to housing is impossible in terms of making money. These buildings are not designed that way. Even old homes from the 60’s / 70’s is not easy. A lot of elbow grease to get them modern and efficient.
These building were thrown up fast and loose. The amount of work would be insane. Not worth it. Better off leveling it and converting the land to tobacco farms for electronic cigarettes and I’m not joking. This is worse than a dead end. More like a dead end with a cliff at the end.
Yes. Level them. Convert them to farmland. Get paid for not growing wheat or not growing corn or not growing soybeans.
I think perhaps RFK’s proposal of low interest loans for first time home buyers probably would garner a lot more of the younger generations votes and would be more stimulative to the economy long term with the potential for more family formation and better demographics.
The $45 billion hotel conversions should go to provide migrant housing.
Instead of the government paying $400 a night for migrant hotel housing, they can set up a public-private partnership where hotel rooms are converted to apartments at a cost of only $500,000 per room and then lease them back to the government for $300 a night – a savings of $100 a night.
Homeless housing as well
Dear Mish You can’t reason with psychopaths
“You can’t reason with psychopaths”
Or debtaholics.
You can’t fix senility or Alzheimer’s.
……and you will NEVER be able to reason with criminals and absolute STUPIDITY!!
More conversions would be feasible IF regulations, codes, zoning, were also relaxed.
(Something IN BETWEEN the homeless tent cities, and 100% code residential apartments?) Maybe that is part of the plan, maybe not. Depends on the cities involved.
Probably the Biden/Dem effort is not to solve the problem, but to appear to voters as if they are doing something, and maybe sell some more Hunter paintings as they decide who gets the $45B.
“More conversions would be feasible IF regulations, codes, zoning, were also relaxed.
(Something IN BETWEEN the homeless tent cities, and 100% code residential apartments?) ”
That lasts until the first fire that kills someone is blamed on the relaxed building codes.
Converting a hotel is much easier. Take a pair of rooms, put a connecting door between them, tear out one bathroom and replace it with a kitchenette. The plumbing is already there, and you should only need one new wire run for the range.
Where would you put the propane tank?
Maybe more like ‘dormitory’ conversions (remember college?)…
Shared bathrooms. No kitchens to cause fires in sleeping and living areas, because they would have separate existing kitchen/cafeteria areas in the same building or even a nearby building. Maybe these conversions will house the many immigrants that this administration is letting into the country, who will live and work for cheap, maybe subsidized by taxpayers, and eventually vote for their Dem benefactors. Just need some beds/furniture, and some relaxed city regulations, residential codes/zoning. Urban renewal!
Conversion from office is really difficult – we’ve looked at it. The issues tend to be that the floorplates are the wrong size; emergency exits are not located in places that make the demising efficient; locations tend to be great for traditional office work but less great for modern apartment living….the list goes on. I think it was JLL that estimated perhaps 10% of obsolete office space could be converted efficiently.
What’s efficient? 20k square foot floor plates with appropriately placed elevator cores (generally not dead square center like most offices), 5-10 stories – generally stuff that was built more than 50 years ago.
Econ 101 on externalities applies. Affordable housing isn’t efficient to build, so it gets unbuilt despite the fact that we need it. The people who need it have little money, so they end up being underserved. The only way affordable (below 80% AMI) housing gets built is with subsidies of some time – both private (land trusts, foundations, etc.) and public (subsidized debt, section 8 vouchers).
$45 billion would equate to something along the lines of 500 thousand units (plus or minus a big number) if you subsidized it to equate to the cost of new construction (roughly 400k per unit, more or less depending on location). I’m really not sure there’s that much effectively convertible office space that would be available. My gut is that section 8 vouchers and LIHTC tax credits would be more efficient. There’s room for some of this kind of subsidy, but probably not that much room. I’m pretty solidly progressive, but this is a pretty tall order.
On the politics, a rare point of agreement for me with the author here.
re: “People keep telling me rents are falling, I keep doubting.”
There’s a pent-up demand for residential housing, and that impacts rentals in the interim.
Oh come on Mish. It’s not wasted. His brother will be in charge and 10% for the big guy.
Yet Americans wonder “how did we get Trump”.
This is how you get Trump. And this is precisely why he will be the next president.
He will not be the next President but I agree with you on this is why we got Trump.
Not including Mish here but this is what arrogant know it all liberals just don’t get.
Shows you how little the Democrats and the media(1 in the same) think of Americans. They keep telling me its Biden against Trump
They are trying to put Trump in jail and Biden can’t put a sentence together and walk up a flight of stairs.
Biden aint running anywhere. If he does his wife and teh DNC should be arrested for Elder Care Abuse
I suppose it’s not too surprising to learn that in The Land of the Dumb, the idiots are now not only too incompetent to build something as simple and long-since-solved as some housing.
Now, they can’t even figure out how to rearrange a few walls and some plumbing, so that people can have a roof over their heads instead of living on sidewalks; DESPITE the buildings already being there.
Such levels of absolute incompetence, at absolutely everything, can’t be made up. It’s truly mind boggling.
I may be dwelling in the “Land of the Dumb” but I do have construction and development experience and it is not easy and likely not economically feasible to convert modern office buildings to apartments that people will want to live in, not to mention the fact that many urban core areas where these building exist are not where people will choose to live.
I respect your opinion but i have the following to say and maybe I am wrong?
1) not economically feasable compared to what? Are we going to let them rot into the ground and be an eyesore, or more of any eyesore for the next 30 years then pay to just tear them down? Don’t they have to be used for something?
(2) My gut tells me they will be throwing all the illegals into this housing and honestly if they do, they ought to be grateful no matter where it is
At some point “want to live in” is less important than “at the right price”.
“not economically feasible to convert modern office buildings to apartments that people will want to live in, not to mention the fact that many urban core areas where these building exist are not where people will choose to live.”
Not want to live? When the alternative is a sidewalk?
If it’s cheaper to knock them down and rebuild, fine. Do that. But that isn’t happening either, now is it? The incompetence is truly unlimited and all-encompassing.
I can absolutely guarantee that the brainiacs lucky enough to be born in Afghanistan instead of here, would have managed to find a way to make these buildings acceptable to live in, should they find themselves without a cave before winter. While the Chinese would already have found a way to build 20x as many buildings….
Slapping together a place to live which improves on “cardboard box on sidewalk”, isn’t really that hard. It takes a truly special kind of stupid, to not even be able to do that. Even more so, when the building is already standing there…
our best and brightest are building weapons and financing them for our pawns like the nazi ukes and zionist apartheid genociders……………will be buy with us taxpayers. shall we turn the lights off on the poor here too?
It worked in NY but those were old school manufacturing buildings with good bones with nice looking interior brick bought on the cheap for conversion. Modern buildings aren’t built that way. It could never look like the cool lofts in TV shows and movies from the 80’s, 90’s.
Also there is no bustling new art studio, dance, film industry around these clunkers. The whole vibe around it could never be cool and hip. Just ugly buildings that served their purpose like much of US architecture.
a great book, titled “cubed”. history of office space. fun fact, first office building. medicis built uffizi in firenze. so much money they needed clerks to count it. i did construction in nyc as a young man. also lived in converted 100 year old plumbing warehouse on oakland waterfront………20 foot ceilings windows……..all hipster techies……..with micro breweries and weed stores……….everywhere. winery warehouses with bars…………..you are correct. the newer office buildings are junk. in nyc they are going to life science conversions mostly. biochemistry……….labs……..
I have a feeling Biden/Dems will be paying off the commercial RE guys that are hurting from lower occupancy rates – purely to buy votes and contributions.
The Senator from MBNA, the guy elected despite taking bribes from China and Ukraine… this guy is trying to bribe voters? Say it ain’t so!!!!
Of course it’s so. That is business in Washington D.C. Now we also know that is the way the Supreme Court operates too. Like Clarence Thomas said: “You’re not going to get anybody to do this kind of work for what they pay us.” How else would Citizens United have gotten passed. Everyone is getting bribed now, but people just keep voting their party. I think the only way to disrupt this behavior will be a third party.