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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 seri

by 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 The quoted man is comparing the cost to the delta in rent to his out-of-date understanding of what offices can yield.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).

by RC_ITR 3y ago

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).