The Expert Podcast

Remember back when the pandemic was starting, and there was a lot of talk about people not going to the office? Office buildings were empty in many big and small cities, and at the same time, a real estate crisis was starting. A lot of people put two and two together and said, "Well, why not take some of these office buildings and turn them into residential? Convert them from offices to apartments or condos or whatever the case may be." There was this great prediction or wishful thinking that all of this office space could be repurposed into residential and solve the housing crisis. Well, that didn’t happen, and it’s not going to happen. Here’s why.

There are three factors that will prevent large volumes of commercial property from turning into residential. Three factors, and all three of them individually will prevent it. Working together, it’s almost like a deal breaker. First of all, many commercial buildings are not set up as a form factor to be used as residential. These are called deep floor plans. Right? It’s a large building with a lot of offices, and the space is internal, buried in the building. Many residential codes for municipalities require that there be egress windows and daylight windows for any unit. You need a window for a bedroom, a window for living space, and if you don’t have that, it can’t be zoned for residential. Even if it’s not required in the zoning, most people don’t want to live in a cave. You don’t want to live in the middle of a building where you can’t see outside.

Think about every time you stayed in a hotel. Hotels are narrow because you have to have an outside window. Commercial buildings are big square boxes. People don’t mind working in the middle of a building where they can’t see outside, but living in a space like that is different. Also, many commercial buildings, even if you're buried in the middle of the building with cubicles, still allow you to see the window because there are no walls. It’s an open space where you can see from one side of the office building to the other. As soon as you start chopping it up into residential space with rooms, separation, and privacy, you can’t see those windows anymore. That blows the whole deal out of the water; you can’t convert these into residential spaces very easily.

The second reason is the patchwork abandonment of the commercial space. You have a big building, maybe a 20-story building with a lot of space in it across multiple floors. You might say, “Well, let’s convert it to residential.” The problem is, the people who are using it aren’t abandoning the whole building at once. It might be one floor from a law firm that shrinks down and doesn’t use their space, or maybe one company that had two floors but now only uses half of a floor. It’s not the whole building that stops being used; it’s parts of it. So, you can’t convert part of a building. You either have to convert the whole building or not. With parts of it still being used for commercial purposes, you can’t easily convert the whole building to residential. The remaining commercial use isn’t going to go away unless you relocate tenants, but they may not want to move.

Reason number three is probably the biggest one, though it’s more invisible. It has to do with the utilities and mechanics of the building. When you have a commercial building, you can have one large unit that provides mechanicals for the entire building, like a heat pump or a swamp cooler, something that heats and cools the whole building because it’s used by larger tenants. Maybe you sub-meter it onto different floors or have a CAM charge distributed among the tenants on a triple net lease.

As soon as you start doing residential, you have to have separate electric meters, separate heating, separate cooling, separate water, and separate plumbing for all the units. Now, you have to run pipes, wires, and ductwork to all these separate units. That cost might be more than you’re ever going to make up for on renting these units residentially because remember, commercial rental rates are usually higher than residential rates. Even if they’re the same, if you have to start putting in $100-200 per square foot worth of upgrades, it’s almost impossible to make that work financially.

In fact, putting up walls within a space is easy—you can put up partition walls. But once you start having to run plumbing, you need to find space to run that plumbing up and down. These are called chases, where you chase the plumbing from one floor to another. That takes up square footage, and you need to find ways to put in sub-meters. It’s not just as easy as, “Hey, let’s just convert it to residential.” These commercial buildings were designed as commercial to begin with. They don’t have the infrastructure, they don’t have the space allocated the right way, and more importantly, they don’t meet the functional requirements for residential spaces, like windows, multiple stairwells, and egress for tenants.

With commercial space, everyone can access the elevator bank because the floor is open. As soon as you start chopping it up, you may not have the right type of fire escape for tenants.