By Ashley Fahey – Editor, The National Observer: Real Estate Edition, The Business Journals
More than 1 billion square feet of U.S. office space is feasible for residential conversion.
That's according to a recent analysis by CommercialEdge, part of Santa Barbara, California-based real estate software company Yardi Systems Inc. The analysis featured a new Conversion Feasibility Index developed by CommercialEdge, which uses a weighted scoring system to evaluate a building's physical characteristics to determine its suitability for conversion.
The CFI has three categories of potential conversion, with Tier I buildings being top candidates for conversion and Tier II buildings having strong potential for conversion but likely requiring a bit more work and investment than Tier I properties. Tier III buildings face significant challenges and limitations for conversion.
More than 228.3 million square feet of office space nationally — or 2.7% of existing stock — was classified as Tier I, while an estimated 1 billion square feet (12.1% of existing stock) was considered Tier II. Most of the identified viable conversion candidates are within central business districts or urban submarkets.
Doug Ressler, manager of business intelligence at Yardi, said the CFI considers an office building's physical characteristics, such as its floorplates, ceiling heights and dimensions, in addition to location considerations, such as a property's proximity to transit or its Walk Score, a gauge of its walkability.
A building's age also is an important factor and one of the biggest differentiators between Tier I and Tier II buildings, Ressler said. Building codes largely changed in the 1980s, so office towers built before then may have unique structural considerations — and require additional cost to address those differences — as a result.
The CFI is intended to give more visibility into the untapped potential of conversions, which have been challenging for many developers to fully realize, despite surging office-vacancy rates across the U.S.
"You’re starting to see the number of potential conversions ratcheting up," Ressler said. "[It] gives a sense of validation to the fact that, if you’re a mayor of a major gateway city and you don’t have potential property revenue coming in, what do you do with this building?"
The vast majority of the buildings analyzed by CommercialEdge — more than 85% — were deemed Tier III, or least suitable for conversion. The higher interest-rate environment and a tough financing market have become additional wrinkles to making a lot of real estate deals, including conversions, financially feasible. There also remain gaps between what buyers and sellers feel a building is worth, as many groups looking to convert offices into housing or another use are looking to buy those structures at deep discounts.
It's prompted questions in some corners of the industry about whether demolition of some vacant office towers makes more sense than reuse. But in many circumstances, there's still hesitancy to demolish, Ressler said.
"It's not a panacea to demolish," he said. "If you demolish, which is a cost, then you have to look at the next steps. Am I building an economic demand center in that location? Unless you have that planned out, demolition is maybe the first step but it [might be] the wrong step."
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