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Offices are built to different standards than residential use. The amount of effort to add new plumbing and wiring, to separate out utilities, etc is very serio

Offices are built to different standards than residential use. The amount of effort to add new plumbing and wiring, to separate out utilities, etc is very seriously underestimated. There's an old office building near where my parents live that got converted to residential units. The contractor who did the conversion said it would have been cheaper to tear the building down and rebuild, but the owner felt there was some historic value to the building. Either way, the only way to make the transition feasible was to price the units at a luxury level. Mind you, this isn't even California, but the Midwest, where zoning, regulations and construction costs are more sane. I don't know how viable the same project would have been out there.

bilbo0s 3y ago
Conversions are always attractive in real estate because they are nearly always luxury. When I was active in that business, the main problem my bosses had Was rezoning. If they got over that hurdle, they always made a killing. Even before my time, conversions were enormously profitable. In NYC, long ago, converting warehouses and factory spaces to luxury lofts was enormous business. I don't think people should dismiss the amount of money to be made on conversions. The main drawback is that the areas the conversions are in become even less affordable. Which may be more than offset by affordability increases elsewhere in the city.
- f1yght 3y ago
  It's much easier to convert older buildings than newer ones, just due to them being designed differently. You lay out structures different if you're designing a small building for PI style offices than you do if it's a huge open floor plan. It's just more difficult to break out those big spaces into smaller apartments while making sure people have enough light.
- bsder 3y ago
  > converting warehouses and factory spaces Maybe not a warehouse, but a factory is a very different conversion than a gigantic open-floor office--especially if the building is old enough that it existed prior to electricity.
f1yght 3y ago
They're also difficult because modern office buildings just don't lend themselves to small apartments very well. One of the conversions in New York cut a giant hole through the middle of the building so they could have interior units that get light. Giant modern office buildings take a ton of effort to convert.
- RC_ITR 3y ago
  This is actually one of the reasons SF is so well positioned to do this - our floorplates are notoriously small. Take these new buildings for example: SF Offices: - Salesforce Tower: 1.4mn square feet over 61 floors (23k sqft/floor) - 250 Howard: 734k sqft over 43 floors (17k sqft/floor) - 350 Mission: 455 sqft over 30 floors (15k sqft/floor) Office Elsewhere: - 10 Hudson Yards (NYC): 1.8mn sqft over 52 floors (35k sqft/floor) - BMO Tower (Chicago) - 1.5mn sqft over 51 floors (29k sqft/floor) - Block 158 (Austin) - 720k sqft over 35 floors (20k sqft/floor with bottom floors c.3x larger than top floors) Newly built large residential buildings in SF were usually 15-20k sqft/floor (e.g., The Avery), so there are actually very few buildings here that don't work for residential.
  - alephnerd 3y ago
    The square footage isn't the issue - it's the water+gas pipes along with windows and lighting. You'll need to do a floor by floor renovation of water+gas lines along with thinking about how to architect apartments in a way to get lighting. All that is a significant investment in a city with very high labor prices (because most skilled trade types got priced out), so it might not be economical to do such a redesign at the moment.
    - RC_ITR 3y ago
      The alternatives are building a building from scratch while these offices sit empty, no? Certainly you must agree retrofits are cheaper than building an entire new building. Also fyi, SF isn’t even allowing gas in new buildings anymore. I agree with your logic when CRE yields 1.5x the rent of residential, but the model needs to be updated now that it's no longer the case. Is your base cases these offices sit empty forever? Get torn down? I think that line of thinking is the one massively ignorant of the realities of real estate. In a city with almost no residential rental vacancies? That's the end-game? EDIT: For everyone direct-quoting: The conversion alone might cost about $400 or $500 per usable square foot, Mr. Bernstein added, and would in many cases be more expensive than building a new development. A recent Moody’s analysis of New York offices found that just 3 percent of the buildings it tracked would be viable for apartment conversions. The median rent for apartments in New York is $55 per square foot, which just 36 percent of office properties now fall at or below — and on top of that, there’s all the cost of conversion. $500 is nowhere near the fully-loaded cost to build new in any US city. The quoted man is comparing the cost to the delta in rent to his out-of-date understanding of what offices can yield. It is just a simple fallacy to believe that SF/NYC offices can command $75/sqft at any reasonable occupancy level. The economics of conversions only don't work when offices command premium rents, it's not some axiomatic fact about the world (the way it was before the pandemic).
RC_ITR 3y ago
>Offices are built to different standards than residential use. The amount of effort to add new plumbing and wiring, to separate out utilities, etc is very seriously underestimated. People always say this and it is true when CRE yields 1.5x the rent of residential, but we are no longer in that world. The real thing that people underestimate is that now the alternative is building new residential, which is always more expensive than converting. I think a lot of people, for whatever reason, have seen the entire world change due to COVID, but are just unwilling to believe anything has changed about office conversions.
- refulgentis 3y ago
  Unfortunately, or fortunately, it is not the case that building new is always more expensive than converting. NYT article on this subject linked in the thread above this one is extremely informative (as well as the anecdote in another comment)
  - RC_ITR 3y ago
    I assume you mean: The conversion alone might cost about $400 or $500 per usable square foot, Mr. Bernstein added, and would in many cases be more expensive than building a new development. A recent Moody’s analysis of New York offices found that just 3 percent of the buildings it tracked would be viable for apartment conversions. The median rent for apartments in New York is $55 per square foot, which just 36 percent of office properties now fall at or below — and on top of that, there’s all the cost of conversion. $500 is nowhere near the fully-loaded cost to build new in any US city. The quoted man is comparing the cost to the delta in rent to his out-of-date understanding of what offices can yield. It is just a simple fallacy to believe that SF/NYC offices can command $75/sqft at any reasonable occupancy level going forward. The economics of conversions only don't work when offices command premium rents, it's not some axiomatic fact about the world (the way it was before the pandemic).
smileysteve 3y ago
Now shift to communal bathrooms and kitchens, possibly on the ground floor. Immediately the safety codes for ventilation no longer matter, immediately the plumbing is satisfactory. You could even have walls made of cubicle panels. Is this going to be the equivalent of a studio apartment, no, but it should cost a lot less.
deleted 3y ago
[deleted]
closeparen 3y ago
A condo in this neighborhood is at least $1 million. Just how complex can these plumbing jobs be?

bilbo0s 3y ago

Conversions are always attractive in real estate because they are nearly always luxury. When I was active in that business, the main problem my bosses had Was rezoning. If they got over that hurdle, they always made a killing. Even before my time, conversions were enormously profitable. In NYC, long ago, converting warehouses and factory spaces to luxury lofts was enormous business. I don't think people should dismiss the amount of money to be made on conversions. The main drawback is that the areas the conversions are in become even less affordable. Which may be more than offset by affordability increases elsewhere in the city.

f1yght 3y ago
It's much easier to convert older buildings than newer ones, just due to them being designed differently. You lay out structures different if you're designing a small building for PI style offices than you do if it's a huge open floor plan. It's just more difficult to break out those big spaces into smaller apartments while making sure people have enough light.
bsder 3y ago
> converting warehouses and factory spaces Maybe not a warehouse, but a factory is a very different conversion than a gigantic open-floor office--especially if the building is old enough that it existed prior to electricity.

f1yght 3y ago

They're also difficult because modern office buildings just don't lend themselves to small apartments very well. One of the conversions in New York cut a giant hole through the middle of the building so they could have interior units that get light. Giant modern office buildings take a ton of effort to convert.

RC_ITR 3y ago
This is actually one of the reasons SF is so well positioned to do this - our floorplates are notoriously small. Take these new buildings for example: SF Offices: - Salesforce Tower: 1.4mn square feet over 61 floors (23k sqft/floor) - 250 Howard: 734k sqft over 43 floors (17k sqft/floor) - 350 Mission: 455 sqft over 30 floors (15k sqft/floor) Office Elsewhere: - 10 Hudson Yards (NYC): 1.8mn sqft over 52 floors (35k sqft/floor) - BMO Tower (Chicago) - 1.5mn sqft over 51 floors (29k sqft/floor) - Block 158 (Austin) - 720k sqft over 35 floors (20k sqft/floor with bottom floors c.3x larger than top floors) Newly built large residential buildings in SF were usually 15-20k sqft/floor (e.g., The Avery), so there are actually very few buildings here that don't work for residential.
- alephnerd 3y ago
  The square footage isn't the issue - it's the water+gas pipes along with windows and lighting. You'll need to do a floor by floor renovation of water+gas lines along with thinking about how to architect apartments in a way to get lighting. All that is a significant investment in a city with very high labor prices (because most skilled trade types got priced out), so it might not be economical to do such a redesign at the moment.
  - RC_ITR 3y ago
    The alternatives are building a building from scratch while these offices sit empty, no? Certainly you must agree retrofits are cheaper than building an entire new building. Also fyi, SF isn’t even allowing gas in new buildings anymore. I agree with your logic when CRE yields 1.5x the rent of residential, but the model needs to be updated now that it's no longer the case. Is your base cases these offices sit empty forever? Get torn down? I think that line of thinking is the one massively ignorant of the realities of real estate. In a city with almost no residential rental vacancies? That's the end-game? EDIT: For everyone direct-quoting: The conversion alone might cost about $400 or $500 per usable square foot, Mr. Bernstein added, and would in many cases be more expensive than building a new development. A recent Moody’s analysis of New York offices found that just 3 percent of the buildings it tracked would be viable for apartment conversions. The median rent for apartments in New York is $55 per square foot, which just 36 percent of office properties now fall at or below — and on top of that, there’s all the cost of conversion. $500 is nowhere near the fully-loaded cost to build new in any US city. The quoted man is comparing the cost to the delta in rent to his out-of-date understanding of what offices can yield. It is just a simple fallacy to believe that SF/NYC offices can command $75/sqft at any reasonable occupancy level. The economics of conversions only don't work when offices command premium rents, it's not some axiomatic fact about the world (the way it was before the pandemic).

RC_ITR 3y ago

>Offices are built to different standards than residential use. The amount of effort to add new plumbing and wiring, to separate out utilities, etc is very seriously underestimated. People always say this and it is true when CRE yields 1.5x the rent of residential, but we are no longer in that world. The real thing that people underestimate is that now the alternative is building new residential, which is always more expensive than converting. I think a lot of people, for whatever reason, have seen the entire world change due to COVID, but are just unwilling to believe anything has changed about office conversions.

refulgentis 3y ago
Unfortunately, or fortunately, it is not the case that building new is always more expensive than converting. NYT article on this subject linked in the thread above this one is extremely informative (as well as the anecdote in another comment)
- RC_ITR 3y ago
  I assume you mean: The conversion alone might cost about $400 or $500 per usable square foot, Mr. Bernstein added, and would in many cases be more expensive than building a new development. A recent Moody’s analysis of New York offices found that just 3 percent of the buildings it tracked would be viable for apartment conversions. The median rent for apartments in New York is $55 per square foot, which just 36 percent of office properties now fall at or below — and on top of that, there’s all the cost of conversion. $500 is nowhere near the fully-loaded cost to build new in any US city. The quoted man is comparing the cost to the delta in rent to his out-of-date understanding of what offices can yield. It is just a simple fallacy to believe that SF/NYC offices can command $75/sqft at any reasonable occupancy level going forward. The economics of conversions only don't work when offices command premium rents, it's not some axiomatic fact about the world (the way it was before the pandemic).

smileysteve 3y ago

Now shift to communal bathrooms and kitchens, possibly on the ground floor. Immediately the safety codes for ventilation no longer matter, immediately the plumbing is satisfactory. You could even have walls made of cubicle panels. Is this going to be the equivalent of a studio apartment, no, but it should cost a lot less.

deleted 3y ago

[deleted]

closeparen 3y ago

A condo in this neighborhood is at least $1 million. Just how complex can these plumbing jobs be?