https://marginalrevolution.com/marginalrevolution/2022/06/wo…
We show that the pandemic has had large effects on both current and expected future cash flows for office buildings. Remote work also changes the risk premium on office real estate. We revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects. We find a 32% decline in office values in 2020 and 28% in the longer-run, the latter representing a $500 billion value destruction. Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability
Seems like they could recover some of that by repurposing the lower quality office buildings to housing.
intercst
Intercst,
I forget the accounting treatment but empty space is probably a write off.
I forget the accounting treatment but empty space is probably a write off.
“Write off” is shorthand for “I lose a dollar, but I am able to take 25¢ off my taxes.”
Time to convert to residential condos to fill in some of the supply shortage.
IP
Time to convert to residential condos to fill in some of the supply shortage.
I’ve read that this is very difficult (read as “expensive” and “time consuming”) to do because of how water supply and other plumbing is constructed in office buildings versus how they are done in residential buildings. One article showed a mockup where all the plumbing/water is at the core of the building, and adding plumbing elsewhere would require massive reconstruction through the structural layers between floors. It was an interesting illustration … and of course I can’t find it again!
MansionGlobal says office to condo build outs are “pricey”.
https://www.mansionglobal.com/articles/could-luxury-homes-on…
But other operators say it’s doable if you get the office building at a large enough discount.
https://renx.ca/art-of-flip-converting-office-buildings-apar…
I suspect paying 30 cents on the dollar-construction cost for surplus office space solves a lot of condo conversion problems.
intercst
Seems like they could recover some of that by repurposing the lower quality office buildings to housing.
This was the topic of a very recent TMF podcast.
The main issue on why this isn’t done or done more is that most office buildings don’t have the required infrastructure in place for all the added bathrooms and kitchens (power and plumbing).
Therefore it is very costly in most cases to upgrade the building.
Mike
<<>>
This was the topic of a very recent TMF podcast.
The main issue on why this isn’t done or done more is that most office buildings don’t have the required infrastructure in place for all the added bathrooms and kitchens (power and plumbing).
Therefore it is very costly in most cases to upgrade the building.
It depends on what you pay for the office building. If I can buy it for 30% of its construction cost, I can afford a lot of power and plumbing mods.
The biggest obstacle to conversion is building codes requiring that every apartment have a window. That limits you to narrow office towers vs. the big square ones with a higher floor area to window ratio.
https://renx.ca/art-of-flip-converting-office-buildings-apar…
intercst