FWIW, this is also an own-goal caused by dumb zoning policies. Regardless, the point that "we need to legalize the construction of residences to bring down prices" stands.
I live in a condo complex that used to be a high school.
We all have electric heating and cooking, because there wasn't gas connections (which is annoying, but tolerable). We all have 14 to 16 foot ceilings (which is actually kind nice). The bathrooms were all somehow renovated and some plumbing rerouted. We have shared laundry downstairs (which sucks, but not as much as living in a tent city).
Someday there should be an actual HN article by an expert breaking down what's involved to renovate an office into apartments. It's clearly not impossible.
Nothing is impossible given enough money. But on the whole, it is much easier to convert hotels, motels, and I suppose high schools given that they are already subdivided into rooms of a decent size and each room has natural light.
The issue with commercial offices is that the buildings have gotten larger and larger, but residential building depth will max out at around 45 feet, leaving a massive unusable interior.
That's CRE vacancy. $300k will barely get you a condo in Oakland; $200k won't, it'll only get you random patches of dirt.
CRE vacancies are unsurprising. You may not have noticed, but we just had a huge multi-year pandemic that moved huge amounts of work out of offices and into homes.
"Not easily reusable" What does this even mean? Will settle for even a rough rounded up ballpark conversion cost that we can break down on a square foot basis.
> The cost to convert offices to an average apartment building is about $100-$200/SF[4], although that cost could be significantly inflated now. If we assume $150/SF of hard and soft costs plus a 15% profit margin of $23/SF, a developer will need to seek offices available at $262/SF. Exhibit 1 below shows that the median New York office transaction price was $542/SF in 2021, with about 20% traded at $262/SF or lower.
> First, we looked at office rent per SF. The median apartment asking rent is $55/SF in NYC[5]. As Exhibit 2 shows, about 36% of NY office properties fall below or meet the median apartment rent per SF. A developer would likely seek offices with rents much lower than $55/SF because of the amortized cost of conversion, but again this is a rough exercise to broadly understand potential scale of the conversion trend. We also considered vacancy rate. Typically, developers would seek prospective office building conversions with above average vacancy, both because it’s easier to buy out or relocate fewer office tenants and high vacancy may reinforce that office space isn’t the highest and best use of a property. Of the 1,066 tracked NYC office properties, only 12% met our vacancy rate threshold of 30% or higher. When apply the two limits of $55/SF rent and 30% or higher vacancy rates, only 0.7% of Class A buildings and 6% of Class B/C buildings make the conversion reasonable.
> The size and shape of typical office buildings also limits potential conversions. Office buildings typically include deep floor plates and limited natural light for interior offices and storage rooms. However, natural light throughout is essential for dwellings, so apartment depths tend to max out around 40-50 ft. Much of the office building may be rendered unusable (or of very low value) with deep floor plates beyond 100-120 feet wide, after accounting for elevator and mechanical cores.
> An office building with a floor plate of less than 14,000 SF may be a good candidate for conversion, depending on the building shape. In the worst case the building is square (where both sides are equally as deep), the floor plate will be roughly 120 ft by 120 ft, resulting in just about the absolute maximum depth of 50 ft of apartment on one side and 50 ft on the other, with at least 20ft of elevator core and mechanical between. Of course, there may be other orientations of buildings (and creative solutions of designers and developers) that either allow or preclude profitable conversion, and that can even vary up and down a building’s stacking plan. But once again, this is a “rough justice” analysis. Without detailed information on all NYC offices’ floor size and shape up and down the buildings, we assume a convertible building to have an average square floor plate size of 14,000 SF. Layering in the 14,000 SF floor plate threshold on top of our vacancy rate and asking rents limits, only about 3%, or 35, of NYC office properties would be convertible via our (crude but reasonable) methodology.
35 converted office buildings is hardly a dent in housing demand for all of NYC.
"However, natural light throughout is essential for dwellings, so apartment depths tend to max out around 40-50 ft. Much of the office building may be rendered unusable (or of very low value)" sounds like that problem is actually the solution to these arguments to me.
Given the high cost of conversion, those interior spaces will not command the rent to cover their conversion costs. And to leave it alone would force rents in the rentable areas up even higher.
"developer would likely seek offices with rents much lower than $55/SF" we can easily see some at $25-35/SF given ~25%+ a yielding $0/SF. Depress the building costs as well. Too many models hung up on the pandemic and tech bubbles.
Additionally, Moody's, not exactly the guys you want to stand on for downside real estate projections.
Commercial real estate in SF is in its worst straights yet.
Let's see how all these numbers average out after valuations continue to reset in both forms of real estate, tech, local construction, etc. Commercial owners are on course to paying people to sleep in buildings to look occupied.
The bottom-line is the sheer volume of commercial square footage, rapidly dropping residential values, tech layoffs, will eliminate the "shortage" story butting up against NIMBY'ism and Socialism faster than cases with high power attorneys and rich landowners will give up legal ground in California.
