As American manufacturing declined over the decades, major cities inherited vast stretches of disused factories and warehouses. Eventually, savvy owners and developers redesigned and renovated that manufacturing space to create desirable downtown condominiums and loft apartments, often with stylish industrial accouterments.
Now, in metropolitan business environments forever altered by the Covid-19 pandemic, an abandoned office space is today’s empty factory. With many major urban areas still facing housing shortages for working professionals, the minds behind a new trend explore the possibility of transforming offices into residential real estate opportunities.
According to a recent Rent.com report, cities across the U.S. are seeing office vacancy rates averaging higher than 20%. The areas with the highest reported number of open office space include Fairfield County, Connecticut (32.6%), Westchester County, New York (25.6%), Houston,(25.4%) and Brooklyn, New York. (25.2%).
With a growing sense that viral pandemics might become a seasonal phenomena, and with remote-work technology proliferating the cultural landscape, there remain questions if those empty offices will ever fill again. Residential transformation could prove a solution for real estate companies possessing ample empty buildings.
While developers have the urban space to transform quiet offices into new condominiums or luxury apartments, the question remains if they want to take on the considerable cost. Like disused factories and warehouses, orphaned offices require reparceling and utility servicing to create living spaces.
Government Incentives Are Percolating
David Downey, president and CEO of the Washington, D.C.-based International Downtown Association, or IDA, says his organization is supporting the effort to reduce disused office space. He cites the Revitalizing Downtowns Act now before Congress as a key to pushing this metropolitan repurposing effort forward.
Sponsored by U.S. Senator Debbie Stabenow, a Michigan Democrat, the bill “expands the investment tax credit to add a qualified office conversion credit.” The 20% credit must apply to qualified converted buildings. The bill defines such a pre-conversion property as a nonresidential property available for lease to office tenants; a property substantially converted from an office use to a residential, retail or other commercial use; a building initially placed in service at least 25 years prior to the beginning of the conversion; and a building with an allowable straight line depreciation.
“IDA is supporting (the Revitalizing Downtowns Act) to incentivize conversion of underutilized office space into other uses, including residential,” Mr. Downey said.“The rehabilitation concept is similar to urban warehouse conversion from recent past decades. However, downtown office asset values are significantly more expensive than vacant industrial warehousing, which is why a conversion tax credit incentive is so important.”
Acknowledging a housing shortage in many city environments, Mr. Downey considers such governmental involvement essential to pushing repurposed office use forward in many cities.
“Greater housing levels in downtowns is imperative for building inclusive and resilient cities,” he added. “Throughout the pandemic, city centers with more residents were able to sustain small businesses and remain more vibrant even when the daytime office worker traffic was diminished.”
Plus, the benefits of new housing emerging from abandoned offices are practical, enabling more residents to live and work while dramatically reducing commute time and congestion, Mr. Downey said.ARTICLE CONTINUES AFTER ADVERTISEMENT
Redevelopment Could Take Some Time
David Bitner, global head of capital markets insights for global real estate serving firm Cushman & Wakefield, said the concept of making abandoned urban offices into condos or rental properties remains in its infancy as the industry comes to terms with the transformational necessities.
“The reality is that it is typically difficult and expensive to convert urban office space into residential use,” Mr. Bitner said. “For many of these to pencil, you would need to have buildings that are substantially vacant and have undergone dramatic write-downs. There are certainly cases where this will transpire, but it will only ever be a marginal influence on the office and multifamily markets, respectively.”
Mr. Bitner said conversions of older warehouses to offices was a niche or opportunistic development trend driven by demand for adaptive re-use offices from top-tier tenants. The pre-divided office layouts may not lend themselves as easily into homes.
Article Source: Mansion Global