Architects Explain Criteria For What Makes A Commercial Building A Good Candidate For Residential Conversions

The historically high vacancy rates in America's office buildings paired with the housing affordability crisis that's gripping many American cities has a lot of people asking the same question: If there is an over-abundance of vacant office space and a lack of new, affordable housing stock, why not solve both problems by converting office buildings to residential spaces?

The short answer to that question is that making these conversions is harder than it sounds. With that said, Gensler, an architectural firm with experience in this field has come up with an algorithm that gives each building a score based on its advantages and disadvantages in terms of converting it to a residential space. Benzinga looks at the issues facing the commercial sector and whether commercial-to-residential conversions can save it.

The Clock Is Ticking On Commercial Real Estate Debt

America's affordable housing availability crisis has been analyzed at length. It boils down to a lack of new affordable housing inventory and a growing number of Americans who need affordable housing. The commercial sector's problem is almost the exact opposite. There is simply too much of it, and with millions of Americans working from home, the oversupply looks like it could be permanent.

The problem with that of course is vacant buildings don't make money and numerous regional banks throughout the country are heavily invested in commercial real estate. At a time when some markets are struggling with 30% vacancy rates, there is nearly $1 trillion worth of commercial mortgages coming due in 2024. Higher interest rates are going to make a lot of that debt more difficult — and more expensive — to refinance.

In many cases, property owners won't be able to refinance, and if there is an outbreak of commercial/office foreclosures, several regional banks could fold in a short period. If that happened, the potential implications to the economy are frightening to contemplate. For people on the industry side of the question such as bankers and developers, it's this threat, and not the lack of affordable housing, that's behind the push to repurpose vacant office space as residences.

Don't Miss:

• Investing in real estate just got a whole lot simpler. This Jeff Bezos-backed startup will allow you to become a landlord in just 10 minutes, and you only need $100.
• Miami is expected to take New York's place as the U.S. Financial Capital. Here's how you can invest in the city with as little as $500 before that happens. 

What Makes A Building A Good Candidate For Conversion?

Gensler studies office-to-residential conversions in cities throughout North America. In an article published on Microsoft Start, Gensler principal Sheryl Shulze discussed a conversion feasibility study of several office buildings in Calgary that a team she headed performed. 

The firm ended up developing an algorithm that could quickly analyze several different building characteristics and factors to give each one a score for how feasible it would be to complete the conversion. Some of the challenges they uncovered included:

• Many office building windows don't open, which is a must for residential spaces.
• Many large office building floor plans are difficult to divide into units that get adequate light.
• Buildings smaller than 30,000 square feet seem to be the ideal size.

One Recurring Theme

Although some buildings will be easier to convert than others, one common theme ran through almost all the feasibility studies Gensler conducted. The conversions will be costly, and reserving the converted units for affordable housing will probably only be possible with significant public subsidies. In other words, partnerships between the public and private sectors will be key to the conversion efforts.

Schulze also recommends a more versatile approach than just converting office space to residential. In her ideal conversion, the repurposed building would have many different spaces that are essential for living. Some of the spaces and services she envisions operating inside include:

• Retail
• Healthcare facilities
•  Public spaces such as libraries

It may be possible to create an environment where numerous types of operations work simultaneously in one building. For buildings where that's possible, it would be a win-win scenario. However, Schulze believes the groundwork for public-private partnerships in building conversions must be laid now because once the crisis begins and buildings become massively devalued, it may be too late to stem the tide.  

Read Next:

• Elon Musk has reportedly bought 6,000 acres of land just outside of Austin. Here’s how to invest in the city’s growth before he floods it with new tech workers.
• Collecting passive income from real estate just got a whole lot simpler. A new real estate fund backed by Jeff Bezos gives you instant access to a diversified portfolio of rental properties, and you only need $100 to get started.
• Whole Foods' landlord has delivered a 15% net IRR for its investors since 2015. Check out the latest investment opportunities added to its platform.