There’s a housing problem in the United States. Low interest rates, tight supply, and high demand have pushed prices to record heights for homebuyers and elevated rents to equally unaffordable heights in many places for many workers struggling with relatively low wages in a pandemic-convulsed economy.
Meawhile, the pandemic emptied office space across America, and the recovery has been slow and uneven. Prognostications are all over the place about how many people will ever actually return.
For instance, Green Street analysts predict a 15% reduction in office space demand and that office net operating income (NOI) probably won’t beat inflation over the next five years.
As the firm’s Daniel Green says in a GlobeSt.com article this week, "To put it simply, if remote work causes a reduction in office demand, and if the U.S. supply growth continues at about 1% per annum, unless you have a mass conversion of office space, or demolish office space over the next few years, you’re going to get elevated vacancies across the U.S."
So, what about creating that mass conversion? There have been some instances of empty hotels, for instance, being converted to affordable housing -- especially for homeless people -- and some nascent efforts to turn moribund malls into mixed-use properties that would include housing of various types.
But what about all that empty office space? Is this a case of two birds that can be killed with one stone? (Just a figure of speech here, please don’t kill birds.) NBC News recently posted a well-reported piece explaining why office-to-housing conversions are very few and far between and likely to stay that way.
The 'Goldilocks factor' and economies of scale
Whether the conversion is for helping the homeless or catering to the affluent, a lot of empty office space is in buildings that simply don’t lend themselves to it.
"There's limiting factors to why adaptive reuse hasn't happened as much. There's a Goldilocks factor: The floor plate can't be too small, and it can't be too big," Kristina Garcia, a researcher with the big commercial real estate brokerage Cushman Wakefield, told NBC News.
The article goes into more detail about why that’s an issue. It’s particularly a problem in the big office towers that are sitting relatively empty in central business districts to varying degrees across the land.
Plus, even during these tough times, the income that affordable housing could bring in may not be enough to justify that kind of expense. Such a project may be better suited, in fact, to high-dollar living. An example the article notes: the conversion of 100 Van Ness next to San Francisco City Hall into 600-square-foot, one-bedroom apartments renting for around $4,000 a month.
Rents like that can add scale to a project that affordable housing simply couldn’t be expected to, even with generous tax breaks and subsidies, it would seem. Even in a city like San Francisco where the article notes commercial real estate vacancy rates hit 15.4% in the second quarter, more than double pre-pandemic levels.
Only a trickle of such conversions in some major markets
The NBC report says that only 12 commercial-to-residential applications have been filed so far this year, and only 100 since the beginning of 2020. That includes requests ranging from the use of a single floor to the entire building.
Checks with planning departments in San Francisco; San Jose, California; Seattle; Phoenix; New York; Fort Worth, Texas; Dallas; and Houston came back with the same results, the report said. (That includes only two in Phoenix, adding about 225 apartments in a city of well more than 1.6 million people.)
City officials and property owners alike also often share the notion that such conversions don’t make a lot of economic and civic sense in the long run.
"There's definitely an incentive for cities to continue to promote vibrant central business districts that are centered around employment," said Manan Shah, an architect with a Bay Area firm that has studied and worked on such conversions for years.
"We would need to see a long-term trend and vacancy was high for a number of years for somebody to take the time to go through the conversion process,” Shah told NBC News.
The Millionacres bottom line
Add to all these reasons the fact that it’s cheaper in many places to simply buy unused or underused land and build afresh -- affordable and otherwise -- and the idea that mass conversions of empty office space to housing will become a major thing seems even less likely.
It does seem like a good idea, though. Then, so does something like massive desalination of ocean water to address both the water supply crisis and maybe even in the long run, rising sea levels. You can think big, but that doesn’t mean it’s feasible or, in the case of pouring massive amounts of ocean back onto the land, even possible.
Meanwhile, there are easier ways for real estate investors to get involved in affordable housing and CRE, just not necessarily in the same project.