We've spoken several times in the past about the glut of office space in city centers. Now that so many are working from home, it's unlikely that many of them will return to office buildings except for short-term visits. Some companies are having staff come in one or two days a week, and work from home the rest of the time; others are having meetings centrally, but then those involved go home to implement what was discussed.
That brings up the question: what's to be done with all the suddenly vacant office buildings? Wolf Richter reports on one solution.
Commercial buildings – not the land – are depreciated to zero, and for most of them, that’s the ultimate value. But for some, there is a second life with a different purpose: Redevelopment into residential buildings.
For 2021, a total of 20,122 apartments are expected to be completed, in 151 buildings of all types, with a surging share of office buildings ... By comparison, new construction starts of multi-family buildings with five or more units averaged around 370,000 units per year over the past five years. The number of completed buildings in 2021, at 151, are over double the number in the prior two years.
. . .
Redevelopments could cost about 30% to 40% less than new construction for the same number of units, but only if the cost of the site and the building is not significantly higher than the cost of site acquisition for new construction ... This is why a landlord that owns the office building at the cost of an office building, and uses it as collateral for loans, cannot redevelop the building. This would be too costly; and the lenders would refuse. So when the office building empties out, the landlord lets it default and go back to lenders which then sell it for cents on the dollar to a developer, who then owns it at a much lower cost base and can then invest large amounts to redevelop the building.
Here is an office redevelopment in Washington, D.C., The Wray with 150 apartment units, in a building once occupied by the State Department:
Going forward, for 2022 and beyond, 306 buildings are already in the pipeline for redevelopment, with an expected 52,700 apartment units ... Of them, 23% are office conversions.
There's more at the link.
This raises a number of interesting questions.
- Will the building (re)developer set apartment prices/rentals at an affordable level, or will he try to milk every last dollar and cent he can get out of them? If the former, I can see a big demand from young couples looking to get into the housing market for the first time. If the latter . . . not so much. Another question is how large the apartments will be - will they justify the price/rent asked for them? At The Wray, mentioned in the excerpt above, the apartments appear very small to me (although I may be out of touch with city apartment reality, I guess).
- Will corporate investors try to buy as many of the apartments as possible, just as they're buying up large numbers of houses on the open market, to convert them to rental units? That might give the developers a better return on their investment, but it'd be lousy for those looking to buy affordable apartments.
- What about support infrastructure for the new residents? There usually aren't hospitals, pharmacies, supermarkets, etc. in city centers. Will they have to be built, or converted from existing buildings? Will residents instead learn to rely upon online ordering and delivery? What about fire, law enforcement and other services? How can/will they be expanded or adapted to cope with the repurposed city center? What about high-rise fires, evacuations and similar considerations?
- What about the long-term future of the city center? As long as there were large numbers of office workers commuting in and out every day, they had a purpose. If a lot of people are no longer commuting in and out, but living there, and possibly working from home as well, what will happen to the infrastructure of inner cities? There typically isn't enough parking for office workers' cars - so what about residents? Will living there imply that you can't own your own vehicle, because there's nowhere (or nowhere economical enough) to park or store it? What about the added load on utilities (sewage, water, electricity, etc.) to service all the new apartments? Can the existing infrastructure handle the load, or will it have to be expanded or changed to cope with a different usage pattern?