Yes - many (most?) modern office towers cannot be converted to residential... or if they can it would be incredibly expensive.
And it is not as if the residential market is roaring ... so would there be takers for such a pivot... particularly with 8% mortgages attached. I don't think so.
I just can’t see turning office buildings into hosing will help. It just sounds too expensive to be the feasible, and the cost to do so will make the rent insanely expensive. Things are already too expensive.
Converting to housing? Some markets for housing is already out of reach for many. One would have to consider what is the vacancy rate in residential housing including apartments. Numerous large apartment complexes have been built in the area I reside in. They purchased single family homes at the height of the housing market so they have invested millions. For many the rent is $1500-$2000 per month not including utilities. For someone making $20 per hour it becomes out of reach as the government gets to tax that $20. Many jobs are part time as well.
It harder than most think. Most of the older stuff is going to have to be demolished. Back in the 70s, I can remember all the old, abandoned warehouses/light manufacturing CRE in my city. It was our "playground". It was left over from the first half of the 20th century. It was eventually redeveloped as the novo-rich moved back in starting in the 90s, hence redevelopement of those warehouses. It was multi-decade process.
WCoaster hit it on the head but that's just 1 issue among many. Depending on the value of the office asset, conversion is hugely cost problematic.
The floorplates aren't compatible. The plumbing electrical and other infrastructure and services have to be completely redone and is often more expensive in today's market than the original ground-up construction.
In many cases it's more cost effective to demolish and rebuild, but construction capital has dried up nationally and apartment builders are scaling back after making record deliveries the last 2 years amid a slowdown in the previous explosive rent growth. New builds are getting much harder to pencil out.
Then there's the fact that most properties will have to be rezoned, and many cities are loathe to change zoning from commercial to multifamily.
Lastly, the surrounding services and businesses are geared to serve office workers, not residents. There are lots of restaurants but few grocery stores, open spaces, schools, etc.
Multifamily may be the best option, but it's not a good one.
This is the most concise read of CRE bomb I've read honestly. CRE bomb might be the reason Fed starts cutting sooner than later. Converting to apartments is also do to regulations of big cities. FX hedge, when do you think the bomb drops? My analysis says Junish of 2024.
Awesome post. Looking at the FDIC failure list, the exposure of toxic assets seem to be about 30% higher than 2008 as well.. history rhyming with just more leverage this time ha...
Converting office space to residential, though possible is extremely expensive due to plumbing needs for residential vs commercial.
Yes - many (most?) modern office towers cannot be converted to residential... or if they can it would be incredibly expensive.
And it is not as if the residential market is roaring ... so would there be takers for such a pivot... particularly with 8% mortgages attached. I don't think so.
I just can’t see turning office buildings into hosing will help. It just sounds too expensive to be the feasible, and the cost to do so will make the rent insanely expensive. Things are already too expensive.
Converting to housing? Some markets for housing is already out of reach for many. One would have to consider what is the vacancy rate in residential housing including apartments. Numerous large apartment complexes have been built in the area I reside in. They purchased single family homes at the height of the housing market so they have invested millions. For many the rent is $1500-$2000 per month not including utilities. For someone making $20 per hour it becomes out of reach as the government gets to tax that $20. Many jobs are part time as well.
Not now that 3d printing tech where it is. It would be the perfect solution to use cement 3d printers to build the structures inside the large spaces.
"converting empty office space to housing"
It harder than most think. Most of the older stuff is going to have to be demolished. Back in the 70s, I can remember all the old, abandoned warehouses/light manufacturing CRE in my city. It was our "playground". It was left over from the first half of the 20th century. It was eventually redeveloped as the novo-rich moved back in starting in the 90s, hence redevelopement of those warehouses. It was multi-decade process.
WCoaster hit it on the head but that's just 1 issue among many. Depending on the value of the office asset, conversion is hugely cost problematic.
The floorplates aren't compatible. The plumbing electrical and other infrastructure and services have to be completely redone and is often more expensive in today's market than the original ground-up construction.
In many cases it's more cost effective to demolish and rebuild, but construction capital has dried up nationally and apartment builders are scaling back after making record deliveries the last 2 years amid a slowdown in the previous explosive rent growth. New builds are getting much harder to pencil out.
Then there's the fact that most properties will have to be rezoned, and many cities are loathe to change zoning from commercial to multifamily.
Lastly, the surrounding services and businesses are geared to serve office workers, not residents. There are lots of restaurants but few grocery stores, open spaces, schools, etc.
Multifamily may be the best option, but it's not a good one.
This is the most concise read of CRE bomb I've read honestly. CRE bomb might be the reason Fed starts cutting sooner than later. Converting to apartments is also do to regulations of big cities. FX hedge, when do you think the bomb drops? My analysis says Junish of 2024.
Awesome post. Looking at the FDIC failure list, the exposure of toxic assets seem to be about 30% higher than 2008 as well.. history rhyming with just more leverage this time ha...
https://www.fdic.gov/bank/historical/bank/
Do the banks making the CRE loans always hold/service the loans themselves? Or will they sometimes sell the loans?