How Empty Offices Become Apartments In The U.S.
Summary
TLDRThe US faces a record high of 94 million square feet of vacant office space in Manhattan, prompting discussions on converting offices to residential units. While the idea seems promising, not all buildings are suitable for conversion due to legal, structural, and financial challenges. Cities like Washington D.C. and Philadelphia are leading the trend, offering incentives to developers. However, the converted apartments tend to be expensive, and the scale of conversion is not yet sufficient to significantly impact the housing market. The success of such projects depends on zoning laws, government policies, and market demand.
Takeaways
- 🏢 Manhattan currently has a record high of 94 million square feet of empty office space.
- 💼 Large investors face potential defaults in their office real estate portfolios due to the vacancies.
- 🏠 There's a significant challenge in finding affordable housing, prompting discussions about repurposing office spaces.
- 🔄 Converting office buildings to residential units is not straightforward due to various constraints and regulations.
- 📈 Only a small percentage of office buildings are suitable for conversion, with factors like age and layout playing crucial roles.
- 🏗️ Cities with older office buildings, like Washington D.C. and Philadelphia, are leading the conversion trend.
- 💡 'Remassing' is a technique used in conversions to improve the layout and functionality of the building for residential use.
- 💸 Converted apartments tend to be more expensive, which may not address the need for affordable housing.
- 🏙️ Zoning laws and regulations are a significant barrier to converting offices to residential spaces in many cities.
- 🏛️ Incentives like tax abatements can encourage developers to undertake office-to-residential conversions.
- 🌐 The scale of the housing shortage in the U.S. far exceeds the potential supply from office conversions alone.
Q & A
What is the current record for empty office space in Manhattan?
-The current record for empty office space in Manhattan is 94,000,000 square feet.
Which major investors are facing defaults in their office portfolios?
-Major investors like Blackstone and Brookfield are facing defaults in their office portfolios.
What opportunity do mayors see in the current real estate situation?
-Mayors see an opportunity to change the mix of uses in downtown areas by converting unused office space into housing.
What is the percentage of New York stock that is convertible into residential units according to the script?
-About 3% of the New York stock is seen as being convertible into residential units.
Why is converting every office building into apartments not as simple as it sounds?
-Converting every office building into apartments is not simple because not every building is suitable for conversion, and some cities have laws making conversions difficult.
What are some of the challenges developers face when converting office buildings into apartments?
-Challenges include ensuring access to light and air, dealing with plumbing and bathroom placement, and the high cost of conversion.
How does the technique of 'remassing' play a role in office-to-apartment conversions?
-Remassing involves modifying the physical layout of a building to make it more suitable for residential use, such as creating additional windows or altering the shape of the building.
What is the typical rent for a single bedroom at the converted Poplar Building in Philadelphia?
-The typical rent for a single bedroom at the Poplar Building in Philadelphia is $2,000 a month.
How does the zoning law in New York City affect the conversion of office buildings into residential units?
-New York City's zoning laws currently make it difficult to convert office buildings into residential units, as commercial buildings are generally allowed to take up more space than residential ones.
What is the role of government policies in facilitating or hindering office-to-apartment conversions?
-Government policies, such as zoning laws and tax incentives, can either facilitate or hinder office-to-apartment conversions by affecting the financial feasibility and regulatory requirements of such projects.
What is the estimated number of additional market-rate homes needed in the U.S. for low-income renters?
-The U.S. needs about 7 million more market-rate homes at affordable price points for extremely low-income renters.
Outlines
🏢 Office to Housing Conversion Challenges
The script discusses the high vacancy rates in American offices, particularly in Manhattan, and the potential for converting these spaces into housing. It highlights the complexity of such conversions, as not all office buildings are suitable for residential use due to factors like layout and plumbing. The script also mentions the role of zoning laws and incentives in facilitating or hindering these conversions. Examples of successful conversions in cities like Washington, D.C., and Philadelphia are provided, emphasizing the need for creative solutions to maximize natural light and air access in the new apartments. The economic implications for developers and the potential impact on housing supply in cities are also discussed.
📉 High Office Vacancy Rates and Their Impact
This paragraph delves into the current high office vacancy rates, especially in New York, and the financial challenges this presents for investors. It discusses the historical context of these rates and the effects on the real estate market, including the decline in office REIT stocks. The script also touches on the broader implications for city centers, including the need for downtown revitalization and the impact on government finances and services. The role of zoning and policy in enabling or preventing office-to-residential conversions is explored, with examples from New York and Washington, D.C. The potential for such conversions to address housing shortages is also considered, along with the criticisms and support for policies that encourage these developments.
🏗️ The Scale of Housing Need and Policy Solutions
The final paragraph addresses the significant need for affordable housing in the U.S., particularly for low-income renters, and the gap between the demand and the supply of housing. It outlines the challenges in meeting this need, including the forecasted shortfall in new apartment units in New York by 2030. The script discusses the potential for office conversions to contribute to the housing stock, with projections for the creation of new units over the next decade. It also emphasizes the importance of policy changes, such as zoning reforms and tax incentives, in facilitating these conversions and addressing the housing crisis. The paragraph concludes by acknowledging the complexity of the issue and the need for comprehensive solutions.
Mindmap
Keywords
💡Office Space
💡Conversion
💡Affordable Housing
💡Zoning
💡Vacancy Rates
💡Incentives
💡Plumbing Infrastructure
💡Tax Abatement
💡Market Rate
💡Mechanical Systems
💡Regulatory Hurdles
Highlights
94 million square feet of office space in Manhattan is sitting empty, setting an all-time record.
Investors like Blackstone and Brookfield are facing defaults in their office portfolios.
Mayors are considering the conversion of unused office space to housing to address the affordable housing crisis.
Not every office building is suitable for conversion to apartments due to various factors.
Legal restrictions in some cities make office-to-apartment conversions difficult.
Only about 3% of New York's office stock is considered convertible to apartments.
Older office buildings are more likely to be converted due to their physical characteristics.
Some cities offer incentives to developers for converting buildings into housing.
The office conversion trend is most prominent in Washington, D.C., and Philadelphia.
The Poplar Building in Philadelphia is an example of a successful office-to-apartment conversion.
Challenges in office conversions include providing access to light and air, and reconfiguring plumbing and bathroom layouts.
Converted apartments tend to be more expensive, which may not address the affordable housing need.
In Philadelphia, the typical household can afford about $1,300 in rent, while converted apartments are priced higher.
The Atlantic, a converted office building, has units renting for $3,000 to $6,000 a month.
Office vacancy rates are at historical highs, with New York City experiencing around 12% to 13% vacancy.
Office REIT stocks have plummeted due to the slow return to in-person work.
Zoning laws are a significant barrier to office conversions in New York City.
Washington, D.C., has more flexible zoning laws that allow for easier office-to-residential conversions.
Tax abatements have incentivized downtown development in Philadelphia, but have primarily benefited high-value properties.
Critics argue that incentives for office conversions are unnecessary developer handouts.
The U.S. needs approximately 7 million more affordable homes for extremely low-income renters.
New York City forecasts a shortfall of 500,000 new apartment units needed by 2030.
The complexity of converting office buildings to housing is influenced by factors beyond the control of developers.
Transcripts
Many American offices are sitting empty.
New numbers showing 94,000,000ft² of empty
office space in Manhattan. That is an
all-time record.
Huge investors like Blackstone and Brookfield
are staring down defaults in their office
portfolios. Meanwhile, finding an affordable
apartment can feel impossible, which has a
lot of mayors talking.
We have a great opportunity to change the
mix of uses in the downtown.
Make it easier to convert unused office space to
housing.
So the thing about office to apartment conversions
is it sounds like a great idea.
Nobody's going to the office. We need more
housing supply. Why not just turn all the office
buildings into apartments? Not quite as
simple as it sounds.
Not every office building makes for a great
conversion. Not every conversion should be done.
Not every building should be converted.
In some cities, the laws are making conversions
difficult.
It was about 3% of the New York stock that we saw as
being convertible. And that took into account
differential of price between offices and
apartments, which has not actually diverged as much
as people may think.
But in places that have a lot of older office
buildings, there's a lot of conversion activity
happening.
Some big cities are looking at incentives for
developers who convert buildings into housing.
Nobody does things in the real estate world out of
the goodness of their heart. We have to find
ways to either require or incentivize these things
to happen.
What's stopping cities from converting more
offices into apartments?
And what challenges do developers face when
taking on these massive endeavors?
The office conversion trend is heating up in a
small group of cities led by Washington, D.C.
and Philadelphia.
We are right now in the Poplar Building in
Philadelphia. The building was built
approximately 100 years ago as offices and
manufacturing space for Strawbridge's Clothiers,
it was a giant department store in the last century.
This building is one of several conversions
conducted by the Post Brothers.
Physically, may have had some characteristics that
people might think would make for a tough
conversion. For instance, it's 100ft wide by 400ft
long.
That means lots of dark interior space.
The first consideration for a lot of these
buildings is about access to light and air.
That's why you see in some situations, real
creative redevelopment of these buildings where
people are driving a core into the middle of the
building to allow for additional windows in the
middle.
We took a building that was a perfect rectangle,
carved it into an E.
It's extremely complicated.
It's expensive.
You also have issues of where does the plumbing
lines run and it sounds silly, but you've got to
have a bathroom in every apartment or more than
one. And if you only have a single line of plumbing
or a single area of plumbing because think
about the offices. The bathrooms are only in one
part. It's going to be much more expensive to
convert that.
Builders call this technique remassing, and
it comes in different levels of intensity.
The Poplar in Philadelphia received a
light touch.
We have units that are 50ft deep as opposed to
the typical 25ft to 30ft deep.
We're able to make them work with things like what
are called borrowed light bedrooms or interior
bedrooms with a light and make really attractive
layouts, even though the floor plate might not seem
ideal.
Converted apartments tend to be pricey, much like
other real estate in the U.S.
In a hot market where there's a lot of demand
for housing and a lot of growth such as Denver or
San Francisco, that conversions could
potentially address maybe 10% of the housing need.
That still leaves the other 90%, and so there's
clearly a need to think bigger about how we're
going to build more housing.
Back in Philadelphia, the typical household makes
enough to afford about $1,300 in rent a month.
At the Poplar, single bedrooms can rent for
$2,000 a month.
Then there are projects like The Atlantic, where
units can rent for $3,000 to $6,000 a month.
It was a 1920s Beaux Arts Office building.
We finished the conversion in 2019.
There, for instance, we made a lot of structural
modifications.
As an office building, it had old mechanical systems
that took up basically the entire roof area.
When we're making those major structural
modifications, it's to allow for really high
quality amenities.
The Post Brothers' portfolio includes 12
buildings in the mid-Atlantic with plans
for expansion.
We're generally 96% occupied at all places,
and there might be 1 or 2 weeks where there's
downtime between the old tenant and the new tenant.
That's what we call frictional vacancy.
So that's really the only vacancy we have.
There's a very different story unfolding in office
districts.
Office vacancy rates are pretty high right now in
terms of historical context, the highest that
we ever recorded, and that was 19.3% vacancy
rate on average.
And that was a really stress period.
New York's hovering around 12%, 13% right now.
That's a bad sign for investors.
Some of the office REIT stocks have been really
hammered down over 50% just because of the
back-to-work, which is not going as well as some
might have expected.
How the streets feel in downtowns has changed a
lot in the past three years.
Not all of those changes are permanent.
It is necessary for downtown cities to address
that perception.
Though many offices are quiet, they're not
completely empty. That's a challenge for
developers.
I think the actual vacancy status or occupancy status
is really the single most important prerequisite for
conversion, much more so than, for instance, the
physical layout, the floor plates or the
systems or anything like that. If there's not a
clear path to emptying out the office tenants, it
really can't be converted to apartments.
When a developer looks for an office to convert,
they're looking for certain criteria.
For example, older buildings tend to make for
better conversions, but the typical U.S.
office is newer, bigger and not vacant enough to
be converted yet.
These are massive problems for city mayors.
We have millions of square feet of unused office
spaces that is right now ready to be converted into
housing. This just makes sense.
Office vacancies also affect government
finances. New York City offices generate roughly
$6 billion in taxes each year.
School districts will tend to rely heavily upon
property taxes.
The Transit Authorities like MTA in New York will
tend to rely a little bit more on property tax.
New York has experimented with office conversions in
the past. In the years after September 11th, a
wave of these projects rippled across lower
Manhattan.
We looked historically at going back to 2000 and the
number of conversions we were able to identify,
that did happen in New York, there's 50 something
of them. And it turned out to be about 2.5
conversions per year.
Well, there's no question that rule changes in lower
Manhattan help to spur new life in that part of
the city. And the result has been a success.
The residential population has tripled.
That created tens of thousands of new units and
really turned the battery and that surrounding area
into a residential neighborhood.
The government's policies can determine whether or
not these projects happen. In Manhattan,
commercial buildings generally can take up more
space than residential ones.
That condition and many others can change the
financial outlook of a project.
So the number one issue in New York is zoning.
Washington, D.C., for instance, they have kind
of very technocratically thought out the zoning and
you can effectively convert any office
building by right to residential. In New York,
that's very much not the case right now.
And unfortunately in New York, the zoning is
dictated at the state level and not the city
level. So there's been a lot of fights with New
York trying to get this changed. There's a lot of
people paying attention to the issue.
This is what it takes to get it done.
People are reading through 50,000 pieces of
paper to actually get housing built in our city.
If we have zoning rules and other impediments
which are keeping housing from being constructed,
shame on us.
Especially when you are so seriously seeing people
suffering in New York City and beyond.
In Philadelphia, a ten year tax abatement brought
more development downtown. This policy
saved home renovators and investors more than $1
billion in taxes.
But just over half of those breaks went to
owners of high value properties.
If it was a conversion, you basically were taxed
on the value of the shell that you bought, but not
any of the money you put into fixing it up.
So that's been hugely valuable.
Post Brothers has two major conversions in the
works in D.C., where the local government also
wants to increase tax breaks for downtown
developers.
That's Washington, I think that is frankly one of the
easier markets.
When you look at, for instance, the West Coast
markets, San Francisco has the highest GDP per
person of any metropolitan region in the
country. Office buildings there just four years ago
were valued north of $1,200 a foot.
Four years ago, it had the highest residential
rents in the country higher than Manhattan.
We don't think San Francisco is going
anywhere or there will be a huge opportunity set in
downtown San Francisco.
Critics of these policies say they're unnecessary
developer handouts.
Supporters hope the additional supply will
calm the housing markets in expensive major cities.
The U.S. needs about 7 million more market rate
homes at affordable price points for extremely
low-income renters.
The vast majority of people who are eligible to
receive housing assistance never receive
any. The scale of the problem is much bigger
than the resources that most governments at any
level are prepared to dedicate to it.
You know, there's 500,000 new apartment units needed
in New York by 2030.
In order to remain kind of an equilibrium between
supply and demand, we only forecast 38,000 more
per year going up to there, which will fall
well short of that 500,000.
And it's important that we enable this opportunity
for the sake of our commercial office stock
and for the opportunity to create new housing.
But we do project that over the next ten years we
could create 10,000 to 20,000 units of housing,
and that is our best projection.
But also we recognize that a lot of this is due
to factors, will relate to factors that are well
outside our control.
Questions like interest rates, questions like an
individual property owner's risk tolerance or
building layout.
So we know that there's real complexity here.
Our rules are in the way and we need to fix that.
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