Office Values Plunge while Cities Push for Housing Conversions

It’s another dose of bad news for office space providers. Researchers had previously estimated that remote work would take a 28% bite out of office values by 2029, but they apparently underestimated the impact. They are now predicting the decline will be closer to 44%. On the flip side of that coin, a drop in values will also make it easier for at least some of those buildings to be converted to badly needed housing, with the help of government incentives.   Hi, I'm Kathy Fettke and this is Real Estate News for Investors. Please remember to subscribe to this podcast and leave us a review.   As Bisnow reports, researchers had reported last year that office values would lose about $500 billion in value over ten years, from 2019 to 2029. Now those academic researchers from New York University and Columbia University are saying that office values have already surpassed that amount in just three years, from 2019 through last year. (1)   Half a Trillion Dollar Loss in Value   In New York City, values were down about $70 billion. In San Francisco, the loss in value was more like $33 billion. And in Charlotte, it was about $5 billion. Their research estimated a total of $506 billion, or more than half a trillion dollars, in lost value for the entire nation.   Researcher Arpit Gupta says of the update: “The primary reason for the change is that we now estimate a more persistent work from home regime than before.” He also says that researchers took into account work-from-home rates for various cities and says that New York was hit hard because of a high number of remote workers.   Lost Tax Revenue, Lifeless City Centers   Office owners aren’t the only ones grappling with this situation. Cities are also dealing with lost tax revenue and downtown corridors that appear lifeless as office space sits empty. Unfortunately, not all office space is suitable for a conversion, and conversions are expensive.   According to Josh Bernstien of Bernstein Management in the New York Times, just one in 20 office buildings in Washington, D.C. would be suitable for a conversion. And then the conversion might cost a whopping $400 to $500 a square foot. Bernstein says that it’s often the case that building from scratch would cost less. (2)   Most Office Space is Not Suitable for Conversion   The Times cited a Moody’s analysis that found only three percent of the buildings it tracked would be candidates for conversion because the median rent is so low. In New York, the median rent is just $55 a square foot. The analysis shows that only 36% of the office properties roughly match that value. And then on top of that, there’s the cost of the conversion which includes design issues. As the Times reports, offices may have columns that are 20 feet apart, huge open areas, and windows that don’t open.   But, there is a growing trend to turn at least some of the now empty office space into housing. And state and local governments are recognizing the need for incentives. (3)   States, Cities Incentivize Conversion Projects   California is one of them with a $400 million program. Chicago is another. It’s making almost $200 million available for developers in “tax increment financing” or TIFs. The Department of Transportation website describes a TIF as: “A value capture revenue tool.” It says: “The TIF creates funding for public or private projects by borrowing against the future increase in these property-tax revenues. The intent is for the improvement to enhance the value of existing properties and encourage new development in the district.” (4)   Bisnow reports that the opportunities exist for these so-called “Office-to-Resi” projects and that developers are showing interest, so long as there’s public money to subsidize them. A big decline in office values will also help make these conversions more affordable.   Researchers say the key takeaway from all of this is that: “Remote work is shaping up to massively disrupt the value of commercial office real estate in the short and medium term.”    For real estate investors, when one door shuts, another opens. And the trend to convert office space to residential units is an opportunity, especially when it comes with government incentives. You can read more about this by following links in the show notes at newsforinvestors.com. If you haven’t become a RealWealth member, hit the Join for Free button to learn more about real estate investing. It’s easy to sign up, and will just take a minute.   And please remember to subscribe to this podcast!    Thanks for listening! Kathy Fettke   Links:   1 - https://www.bisnow.com/new-york/news/office/persistent-wfh-could-wipe-44-from-office-values-by-2029-119082   2 - https://www.nytimes.com/2022/12/27/business/what-would-it-take-to-turn-more-offices-into-housing.html​​   3 - https://www.bisnow.com/national/news/office/more-cities-are-giving-away-money-for-office-to-resi-projects-as-threat-of-obsolescence-grows-118474   4 - https://www.fhwa.dot.gov/ipd/value_capture/defined/tax_increment_financing.aspx