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Housing: Developers move to convert empty offices into residential buildings

Yahoo Finance's Dani Romero looks at how some companies plan to handle empty office buildings.

Video Transcript

DAVE BRIGGS: Office space is being reimagined in the wake of the pandemic as millions of square feet of office space in different cities across the country sit empty. Now there's a movement to turn those empty offices into homes Yahoo Finance's Dani Romero joins us now to break down the conversion trend. It needs to happen, but it's not easy.

DANI ROMERO: Yeah, well, this is the big push we've been hearing not only here in New York City, but also in Philadelphia, Boston, Los Angeles, San Francisco-- you name it. These big metropolitan areas have really been enticed to convert those empty office buildings into residential housing. And they're really trying to tackle the housing shortage crunch that our country faces. And so while it might seem like a simple solution on paper, that's really not the case.

There's a lot of legwork that goes into this. From developers to business-- excuse me, building owners that I've spoken to, they have said that there's a hefty price tag when it comes to the planning expenses. One building owner I spoke with said that he's already spent $3 million on a $50 million makeover for a building.

And so there's another developer that I spoke with that talked about this. He created an assessment scorecard. And that really allows them to evaluate the property before they take on the deal. And he said that 70% of the buildings that he has assessed, really, they're not suitable for a conversion. And so as a rule of thumb, from what I've heard as within the industry, is that the cost of the office per square foot would have to really dip below $100 in order for these conversions to really pan out.

But you also have to consider that a lot of these office conversions end up being for luxury residence because you have to think about, the investor has to gain his return on investment, right? And so most likely it'll turn into a luxury home. But let's look at the pros. One of the biggest pros is the speed of construction. A lot of developers and architects really save themselves from demolishing a building and starting from scratch, right? Because they already have the building. And secondly, it's environmentally friendly, which entices a lot of city and state leaders to really move forward with these plans.

SEANA SMITH: Yeah, and Dani, speaking of some of the resistance that we're seeing inside the industry because of that cost, we had Moody's head of commercial real estate analytics Kevin Fagan. He was on the show earlier this week, saying that oftentimes, these conversions aren't worth the work. Let's hear what he had to say, and then I want to get your reaction to that.

KEVIN FAGAN: We had done a study on New York where we found that maybe 3% were viable candidates from both, like, a physical shape of the buildings because some buildings cannot really be efficiently converted into apartments, but also just economically. We hadn't seen a big enough decline in office space, or excuse me, office values and office rents for it to be profitable for builders to actually take the risk of that kind of conversion.

SEANA SMITH: Dani, that pushback very clear there. Are there any incentives or anything else that you think maybe could be offered to the industry down the line to help them maybe convert some of these office buildings?

DANI ROMERO: Well, New York City Mayor Eric Adams, he unveiled his plan just last month to really entice those incentives and turn those obsolete office buildings that we see here in New York City into residential housing. So he said that he's hoping to ease the zoning restrictions, offer tax credits, and also he plans to add about 20,000 residential home units within the next decade. Will that pan out? We'll have to wait and see. The state has to vote on the budget in April.

But nationwide, Washington, DC actually leads the way with these residential conversions. But in California, the state there allocated $4 million for these incentive grants. So you're really seeing this big push. But again, I spoke with one developer. He said, though, that it's a double-edged sword. And the reason is because when a state or a city offers these incentives, some of these developers or investors overbid on a building that really has no value in the end.

DAVE BRIGGS: We just saw Castle System say for the first time we're at 50% return to office. DC is lagging way behind, though. They need this arguably more than anyone. Dani Romero, nice to see you.


DAVE BRIGGS: Thanks so much.