Converting office buildings to apartments is one of those ideas, like electric cars, that looks good on paper but proves difficult in real life. From Tyler Durden at zerohedge.com:
Transforming vacant office buildings into apartments was supposed to solve so many problems, however the reality of doing so has been anything but straightforward.
In 2022, less than 1% of apartments built via new construction were created via office conversions, according to the Wall Street Journal, citing data from RentCafe. The dismal figures were attributed to ‘financing issues, stagnating rental markets and other challenges.’
In an effort to salvage the industry, the Biden administration last month said that it would update guidance for existing grants and spending programs to free up billions of dollars for such conversions, while cities including Washington D.C., New York, and San Francisco are sweetening the deal with tax incentives and faster permits.
That said, the realities of converting office space into apartments, because less than 1% of available office space in major US cities are ideal candidates for the process, according to Avison Young.
In significant ways, the conversion process is getting even harder now. Slowing rent growth might make apartment conversions less attractive to investors, if the trend persists into next year. Asking rents for apartments have fallen 1.2% nationally over the past 12 months, according to rentals website Apartment List.
Construction loans are also far more expensive than they were 18 months ago and many banks now shy away from development lending. A number of conversion efforts are on hold because of higher interest rates. -WSJ
