The Expert Podcast

You remember back when. The pandemic was starting and there was a lot of talk. About people not going to the office office buildings empty in many big and even small cities. And at the same time there was a real estate crisis starting. And a lot of people put two and two together and said well why not take some of these office buildings? At tournament to residential. Convert them from offices to apartments or condos or whatever the case may be. And there was this. Great prediction. Or wishful thinking that all of this office space can be repurposed into residential and solve the housing crisis Well, that didn't happen. And it's not going to happen And here's why. There's three factors that will prevent large Vali. of commercial property turning into residential three factors and all three of them. Individually we'll prevent it and 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 what's called deep floor plants. Right. So it's a large building and a lot of offices and the spaces internal it's central it's buried in the building. Many. Residential codes for municipalities require that there's egress windows that there's daylight windows For…any unit, you have to have a window. For a bedroom, you have to have a window for. living space. And if you don't have that it's not able to be zoned for it. 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. Yeah Think about every time you stayed in the hotel. Hotels are narrow because you have to have an outside window. Commercial buildings or big square boxes. People don't mind working this necessarily in the middle of a building where you can't see outside, but. Living in a space like that as different. Also many commercial buildings even if you're buried in the middle of a building your cubicles in the middle you can still see the window because there's no walls. Right 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 and separation and privacy. Now you can't see those windows anymore. So it just blows the whole deal out of the water that you can convert these into residential space very easily. It doesn't happen that way. Right. The second reason is. The. Patchwork. Abandonment of the commercial space. So you have a big building you have a 20 story building that has a lot of space in it Multiple floors. And you might say well let's convert it to residential Well, the people who are using it are not abandoning the whole building at once. It might be one floor That's a law firm that shrinks down and doesn't use their space. It might be one company that had two floors and now they only use half of a floor. It's not the whole building the commercial building that stops being used. It's parts of it patchwork. So you can't convert part of a building You have to convert the whole building or not. So by having a building that's still being partially used for commercial. You can't convert the building to residential. Or because of parts of it are still being used as commercial. Right. And the…The remaining use is not going to go away unless you paid every Re, you know relocate those tenants but they may not want to do that either. That's reason Number two reason Number three is probably the biggest one Although it's more invisible. It has to do with utilities…And mechanics of that building. When you have a commercial building, you can have one large…Unit. That provides mechanicals for that building a heat pump. Or a swamp cooler or something that heats and cools the whole building. Because it's used by larger tenants Maybe you sub-metering out the different floors or you have a cam charge. That is distributed from the different 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, separate plumbing for all these units…So. now you have to run pipes wires, duct work to all these separate units. That cost might be more than you're ever going to make up for on renting these residentially because remember commercial. Rather rates are usually higher than residential, even if they're the same. If you have to start putting in a hundred $200 a square foot worth of upgrades…It's almost. It possible to do. In fact, putting up walls within space is easy You can put up partition walls, but once you start having to run plumbing, now you have to find space where you can run that plumbing up and down. What's called chases where you chase it from one. Floor to another. That takes up square footage. You have to find ways to put in sub-meters…right. So it's not just as easy as Hey 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, You're not going to have. The. Functional requirements of that space for zoning like windows. Like multiple stairwells. Egress and ingress for…tenants where you have a commercial space Everybody can get to that elevator bank because it's an open floor. As soon as you start chopping it up, you may not have the right type of fire escape for those tenants.