by Zain Jaffer
After the pandemic that caused many global workers to do their office work from home or remote locations using videoconferencing technologies like Zoom or Google Meet, many office space pundits predicted the death of the office space sector. Admittedly many office buildings around the world, particularly the older non ESG compliant 70s and 80s era buildings, do not attract as many tenants as the newer sleek Class A office buildings.
High flying professional offices like law and accounting firms, and Fortune 500 corporations, still need to keep their corporate offices for their investors, shareholders, and customers. But like many smaller price conscious companies, they have downsized their leased space. Hence we see a lot of empty older office spaces, or even cancelled projects.
The Fed rate hikes also made project development debt extremely expensive. Coupled with the decreased office space demand, a lot of planned projects have been cancelled. Existing office spaces that have been built or are being built, are now being returned to their lenders or sold at rock bottom prices just to get out of their debt, particularly because the future lease cash flows are now less than originally planned.
Personally I think eventually there will be a renaissance in office space. People will get tired of working from home and will once again want to reconnect with their real world work environments. But that is probably going to take a lot of time. For now, there will be pain for office space investors, landlords, and property owners, particularly for older or non ESG compliant offices.
So what are the alternatives? Well one of the proposals being bandied about is to convert some of these empty office spaces into residential units. From a general standpoint, it is possible, but not easy to do. There are several hurdles. Sometimes it is better to simply demolish an older building that is already zero book value (fully depreciated) for the underlying land and build a new properly fit for purpose building.
Here are some of the concerns. First is if the building is worth renovating structurally. Is it still a good building structurally and just needs a makeover and repurposing. Another concern is if the building is legally zoned to allow for mixed use with residential spaces, or is purely a commercial and industrial area. However when city and town councils realize that housing shortages can be addressed by rezoning these office areas, this may not be a major concern. Still these need to be done first. Another is if the building is a heritage or historical building. Then there might be government incentives to keep it alive, if not for office use then for residential use.
Another concern is the large floor area of most buildings with only the outer sides of the building having windows. Unless the planned residential units will have large floor areas for rich renters or buyers, it will be difficult to partition these large floor areas to have many residential units, because the center units will not have outside light access. Some developers are able to carve out an empty center corridor that creates windows for the inner units, but this is a major modification and cost.
Most office floors only have three toilets with no bathrooms for men, women, and PWD. Conversion to residential will require individual unit plumbing, sewage, toilet/bathroom and electrical for each. This is manageable, but is another added cost.
There are other concerns, but a major one is if the finished repurposed office building will actually attract potential buyers or renters. If not then the discussion ends there.
Cities and towns with housing shortages are considering encouraging the conversion of these older empty office spaces to become residential units. It will not make sense in many situations as compared to simply building a new fit for purpose residential building.
But for certain situations where it makes sense, it could be a good idea to pursue.
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