PRESSURE BUILDS FOR MORE OFFICE BUILDING CONVERSIONS

 

CALIFORNIA FOCUS
FOR RELEASE: FRIDAY, JULY 5, 2024 OR THEREAFTER

 

BY THOMAS D. ELIAS

 

   BY THOMAS D. ELIAS
     “PRESSURE BUILDS FOR MORE OFFICE BUILDING CONVERSIONS”

 

        Almost no one wants office buildings these days, either to build them or buy them.

 

        In downtown San Francisco, the April sale of an empty 16-story office structure on lower Market Street brought just $6.5 million, less than the price paid for hundreds of California single family homes last year. That was 90 percent below the $65 million price the same building brought in 2016, the last time it changed owners.

 

        In the Arts District of Los Angeles, a fast-developing trendy area just east of downtown, plans to build a 10-story office structure containing many “creative spaces” were cancelled a month later by New York real estate developer Tishman Speyer.

 

        It’s the same all over the country, from Memphis to Maryland, from Manhattan to Market Street, where the commercial real estate firm CBRE the other day issued a preliminary report showing office vacancies in San Francisco at 36.6 percent, up about 1 percent from the proportion of empty office space at the end of last year.

 

        The vacancy rates are not quite so high in cities like Fresno and San Diego. Yet. But empty or mostly vacant properties nevertheless abound all over California and the nation.

 

        Not even real estate investment trusts (REITs) want to buy office towers anymore, with many trying to unload their current stock.

 

        It’s all because of the stay-home orders issued at the start of the coronavirus pandemic, which sent millions of white collar workers to new work spaces in their homes and allowed hundreds of thousands to move to less expensive quarters far from city centers where they formerly had to pay high rents because their presence was required in offices.

 

        When some employers early this year began requiring that workers return to offices at least part time, a wave of resignations ensued. It turns out workers enjoy being at home, away from the prying eyes and frequent demands of their bosses. This has also spurred new fluidity in the job market.

 

That all creates huge financial pressure for converting a major share of current office space into residential units. If REITs can’t collect rents on their properties, but still must make payments for them to banks and other lenders, they need to find another way to profit from buildings they are stuck with.

 

So an office building conversion movement – originally predicted in early 2020 by this column – is getting underway. But it’s not yet going fast enough.

 

        Billions of square feet of office space now lie fallow and could be converted to apartments and condominiums of many sizes and shapes. There can be low-priced units on the lower floors where street noises are common and high-priced penthouses far above them, free of most city noise pollution and enjoying sweeping views.

 

        But so far, only hundreds of thousands of square feet have been converted, leaving the vast majority of vacant space unused while housing construction lags far behind the millions of square feet state authorities say is needed.

 

        After dragging their feet on this for several years, Gov. Gavin Newsom and California legislators last year passed a measure easing the path toward building permits to convert office towers. The same for abandoned big box stores and their large parking lots.

 

        Still, only about 5,200 dwelling units were created via conversions last year in Los Angeles, and one-eighth as many in San Francisco. The numbers were even smaller in places like Sacramento and Oakland.

 

        But this is a movement that is both morally and financially necessary. Market-rate apartments in a converted office building ought to sell for far less than units in a newly-constructed tower. That’s because building and land acquisition costs are far lower for conversions than new structures. Plus, there are fewer legal challenges for conversions, which do not much change the profile and environmental effects of existing buildings.

 

        So expect a boom in conversions soon, with numbers multiplying by at least ten over the next five years. It’s what California needs and whatever this state needs, its people have generally created over more than 170 years of statehood.

 

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    Email Thomas Elias at tdelias@aol.com. His book, "The Burzynski Breakthrough, The Most Promising Cancer Treatment and the Government’s Campaign to Squelch It" is now available in a soft cover fourth edition. For more Elias columns, visit www.californiafocus.net