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?
Peter
15 comments:
Not to mention Grandfathered safety issues like asbestos and lack of decent insulation in those older buildings.
As a Handyman working on homes built in the 70's plenty of those issues to be aware of.
Then you need a job or jobs to support the mortgage. But say you have all that, and you make the leap of faith and buy. You have locked yourself in as a taxpayer to be farmed by your local government. How much have they cut salaries and benefits or employment? Congratulations.
One of the electricians where I once worked lived in a CONEX container in a storage unit. Needless to say, he was a bid odd.
The economy solution would be to strip off the curtain-wall and slide in a modular and hook up the utilities beneath the unit.
Then reinstall the curtain-wall.
A smart developer might want to consider turning the ground floor into a few small shops selling essential goods for apartment dwellers, say a pharmacy, home supplies, and prepackaged meals.
Top floor could become a restaurant and possibly a couple of fast food joints.
Depending on the construction the roof could be turned into a gym and exercise yard.
Market the complex as one where residents never have to leave their building except for entertainment, and with high speed internet not even that so much. With the current situation of rather unsafe streets it would have a certain appeal to some folks.
Single family dwellings? The costs would be astronomical. Plumbing alone would be mind-boggling, if there is enough water available. That, and most all the electrical wiring would need to be ripped out and run at the correct voltage, if the existing voltage is correct. The costs to retrofit might be so high A to mandate demolition and starting over, if there is enough parking.
Few want to accept the economy shifted, technology allows less commuting, and some of the largest building ever constructed have become obsolete. Those that owned the buildings may have equity in a huge money pit.
Not to mention these homebound workers. The time will come when multinationals discover that the East Indians and the like speak better English than some Americans employees. This is not really a knock on our American ethnicities, but our modern American educational system turns out many students that can't be easily understood.
Jess, I agree on the electrical and plumbing issues. Also the ventilation systems of office buildings are totally incompatible with residential usage. Office buildings have one or more central mechanical plants providing temperature controlled air to the building with some local zone controls, typically on a floor by floor basis, with some accommodation for computer rooms. Individual controls for each apartment, exhaust fans for kitchen and bathroom space, and fire isolation for each residential unit will drive costs higher. Essentially all you are getting by repurposing the building is the basic structure, and utility connections to the building. Whether it makes economic sense depends on the age of the building, the local housing market, the costs to do the physical updates, and the compliance costs of dealing with the local permitting agencies.
Wasn't that part of the central gubbermints plan; was to get people crammed INTO central housing? Ya know, like those 50-60's soviet style concrete buildings?
Having people living near their jobs, using mass transit or walking. Eliminating private property (land) because "we can't have anyone 'owning' those fertile fields"
"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?"
The market has an answer to your question. If he tries to milk every last cent then he risks leaving the building vacant, which costs him money. If he makes them too affordable (aka below market value) then it costs him money. This is not a difficult question. Would also point out that if they are advertised and sold (honestly) as "luxury", then less luxurious places, perhaps even ones that used to be really nice but have aged, will open up when people move into this one and the housing market benefits either way.
Concerning all the stuff that commenters here have said are problems (asbestos, plumbing, wiring, etc) don't you think that a developer who is working on an old building is fully aware of those things? After all, that's what he does for a living. If it wasn't economically feasible, he wouldn't be doing it.
Space wise, my sister lives quite happily in a small apartment that is less than 400 square feet. One large room with a bed in the corner, a small kitchen, a small bathroom, and a closet. She has very little stuff and has never shown any inclination to move to a bigger place. I, on the other hand, have a house which takes up a lot of my time in maintenance and repairs. I like having the space, she likes having the free time. The Wray apartments appear to start about 460 and go up from there.
Using the last 10-20 years of "regentrification" of downtown L.A. as an example:
1) Building A gets repurposed; Building B (usually the one needing more expensive upgrades or with problems like asbestos) next door gets leveled, and a brand new multilevel parking structure goes up. Tenants park free, visitors pay downtown premium rates. Same owner/developer owns both, money coming in hand over fist.
2) Utilities get sorted without any great fuss. Ventilation is punching a hole in a former window space. And being older buildings, the windows open. Rooftops become community garden space, and some solar arrays.
3) As Uncle Lar stated, ground floors become retail, providing markets, coffee shops/diners, drug stores, and even department store space, now within a walk down the block, or downstairs. And providing even more jobs in downtown.
Second floors become service businesses: accountants, small law firms, small practice doctors and dentists, and anybody who needs just a small office/workshop space to conduct business. When a doctor making a housecall becomes simply taking an elevator ride, watch medicine change, again.
4) Presence and pressure from yuppies drives the homeless back to Skid Row 24/7, and the new residents' voting bloc numbers force city officials to condone harsher measures to keep them there in perpetuity, in homeless ghettoes. Roving human pittbull security officers become a growth industry, which also discourages petty crime.
5) Traffic downtown increases somewhat, but commuting pressure from further afield decreases commensurately, providing a net plus for transit. More people walk to work, or ride a bus a few stops, rather than driving in from 10-20-30 miles outside of town.
(cont.)
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None of this is hard to figure out, as Manhattan has been a thing for 200 years, and people live there just fine.
The bigger issue is businesses that don't need many, or even any employees sitting at a desk every day. Those people aren't moving downtown, they're moving the f*** out of the cities entirely, and staying out.
The real boon, and problem, is going to be beefing up telecommunications infrastructure (i.e. high-speed internet, 5G, and such) to largely rural lands, enabling people from Fortune 500 companies to live on a farm, and go to work in the living room, with maybe only monthly or quarterly visits to HQ. If that.
The kind of people who do that are likely to be not the hive-mind types, but the red-state base, now no longer forced to work in blue hives to earn their daily crust. They're going to be redder politically than the locals - redder than a sunburnt pig's hindquarters - and about as amenable as refugees from Eastern Europe circa 1950 to further exploits of the socialist would-be overlords once they escape it day-to-day.
Once that reality comes to pass, the polarization of states, which all have blue hives (look at any city or town with a college and a downtown, in any state) escalates, which is only going to exacerbate the city mouse/country mouse phenomenon, and likely, bring it to a rather explosive head.
Everyone likes to talk about secession/breakup, as if that were even possible in a nation of entirely purple states.
Start providing the means to suck all the blue hive-minders into downtowns and concentrate them there, and simultaneously allow the red-stater folks the economic freedom to move out of the burbs and into the countryside for good, and the steam under the kettle of dissolution is going to rise to a boil in record time, and who runs Bartertown at the end of the day is going to become clear in about a New York Minute.
That's what you want to watch.
If the cities depopulate, their political sway decreases.
If their populations get spread afield, their political power decreases as well.
It takes half a generation to see it, but look at how Detroit's collapse is rippling through the rest of Michigan, and how alone, alien, and "othered" Chicongo is becoming to the rest of Illinois, Atlanta to the rest of GA, or St. Louis to the rest of Missouri.
If the rest of NYFS could dump NYFC tomorrow, it'd become a separate entity at the speed of light, and no longer part of the rest of the state.
It's time to make every large city like DC is:
Politically neutered in relation to the larger polity, and run by outsiders, for its own good. Even DC didn't become a hellhole until they foolishly let the locals have self-rule.
There's a lesson there for every state in the union.
This has been covered in fiction 40 years ago.
Oath of Fealty, a 1981 novel by American writer Larry Niven and Jerry Pournelle,
It discusses most of these issues, as well as getting into the Have/Have Not politics of Arcologies.
It is worth a read.
California doesn't allow new single family homes now so that might not even be an options.
Also city centers aren't safe and with intentionally lax to non existent law enforcement around theft issues, no one will want to live there.
To make such an area livable requires amenities but on many areas retail theft gangs mean no retail stores.
The assumption that people are willing to pay huge taxes, huge rents to live in a bug pod and order from Amazon is questionable.
Until cities restore their purpose which is a way off, dead office space is a liability.
Well @aseop I would generally agree with you on that but as you can see with formerly red states going purple (Looking at you AZ, CO, NM etc) is that the idea of states having power or cities being devalued will be flawed for a few reasons.
1. All these asshats leaving the cities for greener pastures are bringing the failed policies or ideas with them. Oh this will work better this time or here. Or would it be nice if this county/state offered these services for trhe people! (folks moving in to Wyoming are like well Wyoming would be so much better if it was like the disaster state we just left!)
2. The amount of people leaving those cities that have say center or right or libertarian leaning policies are going to still be dwarfed by the city growth no matter what. Say you kick out a few hundred residents from Oh I don't know Denver Co, what is the population growth of those that contribute nothing and drain the system in Denver Co in a given year? Or Minneapolis? So on and so forth?
3. Votes matter? LOL.
4. The topic is about commercial spaces and going to residential. Others have pointed out what may need to be done or pretty much a structure needs to be demolished and rebuild to handle that sort of capacity. There's another problem which is not about parking but the assumption that a lot of these structures are in good locations to begin with. There's been a lot of commercial buildings moved out of city centers for well all the above and mostly cheaper to build in the outskirts of city X. Well perfect till now you don't need that space and building an apartment building there won't work for well everyone is either moving out of the cities entirely or just has no reason to jump in to something they can't afford.
You see similar setups overseas. The first one I remember seeing was in San Juan, PR around 1982. I was a kid so probably been aroumd longer than that. Over the last 10nyears I've seen quite a bit of these here in the states. Especially around Universities and in plannes communities. They seem to do well.
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