Hmmm. The Wall Street Journal says that the boom times in commercial real estate loans are now well and truly over:
With the commercial real-estate market now in meltdown, those trillions of dollars in loans and investments are a looming threat for the banking industry—and potentially the broader economy. Banks’ exposure is even bigger than commonly reported. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses.
....Over the past decade, banks also increased their exposure to commercial real estate in ways that aren’t usually counted in their tallies. They lent to financial companies that make loans to some of those same landlords, and they bought bonds backed by the same types of properties.
That indirect lending—along with foreclosed properties, trading portfolios and other assets linked to commercial properties—brings banks’ total exposure to commercial real estate to $3.6 trillion, according to a Wall Street Journal analysis. That’s equivalent to about 20% of their deposits.
On the list of reasons to predict either a recession or a soft landing, I guess you can put this one in the recession column.
It's ok. Trump's buildings are still worth like infinity billion dollars. He testified to that under oath in court recently.
I know nothing about this subject but at this point when I see “the Wall Street Journal says…” I think “Please bullshit me “.
It's important to draw a distinction between the news side of the WSJ and the editorial side. The former is very good, though no longer as good ss it was before Murdoch bought the place. Back then, it was truly one of the best newspapers in he country.
Where most papers have a comics page, the WSJ instead has a prose comedy section. That they title it the "Editorial Page" is a part of the joke.
PickleBall will save them!
Some genius needs to think of how to convert all that office space to living space. I bet Elon could do it, if his mind weren't in outer space.
Practically all the cities involved have very high housing prices. So how do office rental prices compare with residential prices? Even if the new residential spaces were at the high end it could take pressure off the city housing prices.
Converting office buildings to condos is more complex and expensive than people think:
1) Fire codes are stricter for buildings that people sleep in than for buildings that are mostly empty overnight. A building that complies with office-type fire codes won't necessarily comply with overnight-occupied fire codes. Bringing it up to the new requirements might be a big deal.
2) Office buildings have very little plumbing. Typically two bathrooms and a kitchenette on each floor is all there is to it. Condo buildings need a lot of plumbing, because every condo unit has a kitchen and a few bathrooms.
3) If your office building is at 50% occupancy and you decide to pull the trigger on converting to condos, you must first kick out those 50% of your remaining office tenants. Your competitors in the office-space market will all high-five each other.
I am listening to a 99 Percent Invisible podcast about this very topic!
https://99percentinvisible.org/episode/office-space/
It's truly insane that we live in a world where "real estate is about to get a whole lot cheaper for a whole lot of people" is treated as a calamity.
Right? Especially since we're talking about commercial real estate here, which has been oversaturated and the value artificially inflated for literally decades. Even in the busiest cities. DC, for example, has millions of square feet of vacant office space, with over 1M sqft of Class A office space becoming vacant in Q4 2022 (https://myelisting.com/commercial-real-estate-news/1463/washington-dc-office-space-q4-2022-report/).
At some point, these buildings need to be redeveloped into something useful. They're clearly not useful as office buildings.
I got lost right here:
"...losses on the loans trigger banks to cut lending, which leads to further drops in property prices..."
Wouldn't a cut in lending tighten supplies and push prices toward equilibrium?
No. All of that office space already exists, and it won't go away. But commercial real estate is leveraged. The owners always have mortgages on the buildings. If the one they have is winding down, they refinance. Much like corporations in general, it is usually more profitable to operate with a mix of debt and equity financing.
If the lending dries up, it because difficult to impossible to refinance. The buildings become less profitable. Hence, the prices fall.
I don't know why we aren't even talking about what Calgary did when their downtown was abandoned after the shale boom went away. Also all those CEO's are demanding work from the office because the message has come from the top and it has nothing to do with better productivity.
What they did in Calgary:
https://www.cbc.ca/news/canada/calgary/calgary-downtown-office-buildings-converted-residential-1.6816052#:~:text=The%20conversions%20will%20remove%20nearly,far%20total%20about%20%2486%20million
From the article you link:
"The city has set aside $153 million for its office-to-residential conversion program."
Yup. That kind of subsidy will be necessary to make office-to-residential conversion happen on a large scale.
Yes but better than banks defaulting on trillions in debt, and those subsidies will more than come back. Plus no matter what Kevin thinks WFH is not going away. Right now it is a no cost decision to bring people into the office. Once those leases come up for renewal that won't be the case and we will start to see real decisions about coming back to the office. The AI funding boom in SF is a good case study. Will they build out office space or will they save money and extend their run rate.
I agree that this would be a good use of subsidies. I just want it to be clear that if we want office-to-residential conversion to happen at large scale then such subsidies will be necessary.
It's difficult to convert commercial to residential, but not always. And it's not impossible.
But it requires public dollars because it doesn't make a profit - it's too expensive for private companies to do it. Mostly.
The biggest impediment to local subsidies for office-to-condo conversion is the anger of existing condo owners (voters) who don’t want to see the value of their scarce condos reduced.
Says who?
A few months ago you said WFH was going to go away, didn't you?
It appears that US executives think WFH is here to stay.
So to reiterate what I wrote the last time, local jurisdictions need to consider relaxing the building codes to allow for easier, cheaper conversions of offices to residential, and fast.
And which building codes should be relaxed? Seismic codes? Fire codes? Electrical codes, air quality codes, handicapped accessibility? Please be specific.
At the risk of troll-feeding (are you trying to say that commercial buildings are somehow unsafe?), I'll bite.
The ones that get in the way of converting commercial to residential are not really those that you mentioned. They're more to do with things that aren't really safety related like bathrooms, outlet spacing, window requirements, hallway requirements, etc. They're not safety related so much as things that get in the way of the social good for the sake of complying with modern residential codes. As well as the issues of having to comply with modern codes when retrofitting a building, which the building didn't have to comply with when it was first built. Some of that will be safety related, but also some of it should simply be waived. In some cases there are avenues to do this (historic preservation, for example), but converting 1990s office buildings to residential units is not one of them.
Pretty much cmayo is spot on. Just to add some points:
Mechanical Code
IAQ is unlikely to matter. Buildings would be going from B to R occupancy, and with it lower allowed occupancy (150 gross sf --> 200 gross sf). Which also means you wouldn't be worried about egress.
If the Mechanical Code doesn't currently allow for VaVs to substitute for individual units, that's one possible savings that would be helpful.
The case where this might be different is if these conversions included some floors to be dormitory/SRO-type facilities. In this case, density increases, but one can balance that net-gain with the lower occupancy load of upper floors.
Seismic Code
The only time this would apply is if an (extremely) older building that was already out of compliance from current seismic codes, were to trigger seismic upgrade requirements. In this case, I would suggest that the code, similar to accessibility upgrades, prioritize elements that are most critical.
Consider that, absent a change in occupancy, these structures would likely never trigger seismic upgrades in the first place. But also, it's very unlikely that these older buildings would be converted in the first place, given that they have the lowest NNN.
Electrical Code
As cmayo suggested, fewer outlets would help. In general, maximum LPD will be lower in residential (eg hotels) than in offices. The difficulty would be in appliances. But it might be a wash. One key issue will be whether or not the Mechanical Code allows, or is relaxed to allow, VaV in substitution for individual units. Buildings wouldn't need to add power and circuits, even if they had to rewire most of the building.
Fire Code
In all likelihood, again with exception to really old buildings, the structures are already fully sprinklered -- again pointing to a reason why it's very unlikely these older office buildings would be converted. And since they're in the same (low) hazard class, it's unlikely to require upsizing of pressure/capacity.
The one change I would make is to remove rated separation between R/B/E, including (fire) separation walls and smoke partitions. Additionally, I would reduce the smoke partition requirements, such that the only critical element is separation between floors.
Energy Code
I would relax requirements to upgrade to current efficiency code requirements. That way, windows and insulation wouldn't need to be replaced.
ADA Code
Aside from older (in this case, pre-1990s) buildings, this wouldn't matter as common spaces would already be accessible. In the case of older structures, I would limit upgrades to 10% of total construction costs. In the case of minimum accessible units, I would allow it to be limited to 1%, capped at 5 units, and reduced to 0% if the structure included a floor dedicated to SRO-type dormitories that were 100% accessible.
Detailed enough for you? (I can go on about zoning if you wish.)