Repurposing old buildings to become residential apartments or condos

by Zain Jaffer

Given the Fed’s pronouncements that the era of high interest rates seems destined to stay for a while, many real estate developers are holding off on new projects because their financiers and loan sources like the banks are asking for a higher hurdle rate. The cost of capital is high right now, and projects that used to easily get funding are no longer able to get off the table.

However even if less new properties are getting built these days, it is still hard to find suitable properties sometimes depending on the geography because more property owners are not selling. They know that if they sell, and they need more capital to upsize their living space, they need to signup for what could be long term mortgages in the 7-8% range as opposed to 3-4% a few months ago.

Given that properties are still expensive or have barely budged price wise, some property developers are looking at the feasibility of converting some office space or buildings that were not originally intended as residences, and convert these to residential apartments or condominiums.

Generally that is a tough ask because these may have been originally zoned as office spaces. But with hard economic times and the widespread use of Work from Home video technologies, many office spaces in many cities are now vacant. Thus developers and even city governments are struggling to avoid having many properties not generating income and taxes.

It’s tough because of the way office spaces are layed out. Aside from the zoning, office buildings often only have one bathroom for male and female users per floor, or at the most two sets. Unfortunately for residential condos and apartments, each unit will need the proper toilet and plumbing which become added costs.

There’s also the floor space to consider. Most office spaces when delivered may have glass windows in each side. But if the floor area itself is huge, unless the floor is used for large luxury apartments or condos, there will be a large common area in the middle. For luxury properties that may work, but for small units that need their own separate toilet and bathroom plumbing and sewage additions, that common space becomes too large for a low budget apartment. It is hard to sell a residential unit in the middle of all that space without windows.

In addition, the vacant office spaces themselves may be luxury offices and the cost of downtown land in large cities does not make it financially viable to turn into low cost condos as the land is simply to expensive. So it’s only luxury apartments or condos that make sense, assuming it even makes sense for that particular property. If it doesn’t look desirable as a property, it will just be a waste of time and money.

Sometimes though, there are buildings downtown with a classic look that lends itself to be turned into a luxury apartment with a good desirability factor. A good interior designer and architect can make it happen.

While conversion of office properties to residential properties is generally not a desirable first choice, in some rare instances it may make good sense if the property itself looks desirable as a residential property. Sometimes the City, in its desire not to have vacant office space for extended periods of time may even encourage it with tax credits and other incentives.

Right now with the real estate industry in a slump because of high rates, if repurposing office space to residential makes sense, I’d say go for it.