Why a White House Plan to Fund Office-to-Housing Conversions Isn't Working(bloomberg.com)
bloomberg.com
Why a White House Plan to Fund Office-to-Housing Conversions Isn't Working
https://www.bloomberg.com/news/features/2024-02-29/white-house-funds-to-convert-offices-to-housing-find-few-takers
70 comments
When I was young, in college, I applied for a government job. I thought I could make some extra cash.
I went through the interview, was accepted as a candidate, and then ... nothing. So I:
* graduated
* started working on the field
* moved 1/2 way across the country
* worked for 2 more years
And, a total of 3+ years later, was called and told that "Congratulations, your name is now at the top of the list, and we have an opening. You're hired!"
I was completely baffled, and told them I had another job... naturally! (this confused person on the other end of the phone?!). And yet after asking around.. this was normal.
Governments do have a different role, being part of the public trust. But still, a very strange world.
I went through the interview, was accepted as a candidate, and then ... nothing. So I:
* graduated
* started working on the field
* moved 1/2 way across the country
* worked for 2 more years
And, a total of 3+ years later, was called and told that "Congratulations, your name is now at the top of the list, and we have an opening. You're hired!"
I was completely baffled, and told them I had another job... naturally! (this confused person on the other end of the phone?!). And yet after asking around.. this was normal.
Governments do have a different role, being part of the public trust. But still, a very strange world.
sounds like state dept., or maybe something involving clearances
> The funds, typically used to finance rail infrastructure, could now be tapped to help developers of office-to-residential conversions sited near transit facilities.
The problem here is that they tacked this onto a program designed for rail infrastructure financing instead of creating a new program. The rules and restrictions were designed for rail infrastructure projects and probably make sense in that context, but make no sense when applied to building projects.
The problem here is that they tacked this onto a program designed for rail infrastructure financing instead of creating a new program. The rules and restrictions were designed for rail infrastructure projects and probably make sense in that context, but make no sense when applied to building projects.
I think it’s a reasonable amount of time, I am a real estate investor. What is your reasoning for these statements?
Have you really started a deal that took two years to close? Did the property just sit there for two years going unused until it closed? How did you know the seller wasn't going to bolt halfway through?
I've never heard of deals taking longer than a year - how does a multi-year transaction with federal funding even work?
I've never heard of deals taking longer than a year - how does a multi-year transaction with federal funding even work?
> Have you really started a deal that took two years to close? Did the property just sit there for two years going unused until it closed? How did you know the seller wasn't going to bolt halfway through?
You've just described handling e.g. a dry cleaners or dealing with a single elderly owner.
You've just described handling e.g. a dry cleaners or dealing with a single elderly owner.
Sure, you might take years pursing the deal, but what we are talking about is closing on the financing.
When you finally shake hands with the elderly owner of the dry cleaners to buy their property, we're talking about another two years after that before they get their money.
When you finally shake hands with the elderly owner of the dry cleaners to buy their property, we're talking about another two years after that before they get their money.
I think what people are missing is that "real estate financing" is only part of a real estate deal, especially for commercial properties.
And that part might come before, during, or even after securing the property.
People need to think less "buying a house" and more "redeveloping an area".
And that part might come before, during, or even after securing the property.
People need to think less "buying a house" and more "redeveloping an area".
What is your average deal size? A commercial renovation probably land in the tens of millions.
>Who designs these programs?
This is the problem - too often people from industry don't get consulted OR people from industry with deep wallets who want things done a certain way are the only people who get consulted so that they have free reign to create a moat.
This is the problem - too often people from industry don't get consulted OR people from industry with deep wallets who want things done a certain way are the only people who get consulted so that they have free reign to create a moat.
> Who designs these programs?
Interns and entry level executive branch employees design these programs, and then some consultants and lobbyists from the stakeholder industries haggle over hourly payments and retainers until they're happy with the text of the order.
Another question you might ask is, who decides to prioritize this program in the first place? How does the WH administration decide to add a program to its agenda?
Interns and entry level executive branch employees design these programs, and then some consultants and lobbyists from the stakeholder industries haggle over hourly payments and retainers until they're happy with the text of the order.
Another question you might ask is, who decides to prioritize this program in the first place? How does the WH administration decide to add a program to its agenda?
> Interns and entry level executive branch employees design these programs
Not really.
GS-13 and above are fairly competent, but the issue is it's government and you will get some pushback from Political Appointees.
The long tail was probably added in order to prevent headlines of abuse like what happened with the PPP program.
The lossage would be minimal, but the headlines would be a massive headache, so they were most likely forced to add rigorous validation.
> who decides to prioritize this program in the first place? How does the WH administration decide to add a program to its agenda
Recommendations from advisors, staffers, career civil servants, and industry partners.
Not really.
GS-13 and above are fairly competent, but the issue is it's government and you will get some pushback from Political Appointees.
The long tail was probably added in order to prevent headlines of abuse like what happened with the PPP program.
The lossage would be minimal, but the headlines would be a massive headache, so they were most likely forced to add rigorous validation.
> who decides to prioritize this program in the first place? How does the WH administration decide to add a program to its agenda
Recommendations from advisors, staffers, career civil servants, and industry partners.
I knew you were an insider before I clicked your bio, just based on your non-cynical nomenclature of "industry partners." But hey, at least you're a "recovering policy wonk." :)
Out of curiosity, how many "GS-13" employees actually write the technical documentation and legalese themselves, vs. asking their subordinates to produce the initial drafts and then fixing details but missing larger gaps?
Out of curiosity, how many "GS-13" employees actually write the technical documentation and legalese themselves, vs. asking their subordinates to produce the initial drafts and then fixing details but missing larger gaps?
I disagree based on my decade+ experience working with Federal employees. I would guess that 50% of GS-13 to GS-15 (heck even SES) are mostly incompetent, 40% get the basic minimum of their job complete, and the final 10% shoulder most of the work accomplished. I have come across many GS staff given busy work roles so they are "out of the way" of leadership's objectives. :edit: For folks downvoting me, this is just my personal opinion based on my experience working within IT and cybersecurity. My observations can easily be (and may actually be) untrue elsewhere (as noted by replies to my comment). Early in my career, I was a GS-13 myself.
Depends on the agency and role.
You're in cybersecurity/IT which is sadly a massive shitshow in most agencies outside of the DoD and DoE.
All I can say is the grass ain't greener in similarly sized private sector organizations.
Edit: I actually upvoted you. That said, Cyber/IT is treated differently and the GS scheme is different.
Relatively junior Economists, Accountants, and Statisticians won't be given a GS-13 position out the door, but it's more likely for Cyber/IT roles due to the salary constraints.
You're in cybersecurity/IT which is sadly a massive shitshow in most agencies outside of the DoD and DoE.
All I can say is the grass ain't greener in similarly sized private sector organizations.
Edit: I actually upvoted you. That said, Cyber/IT is treated differently and the GS scheme is different.
Relatively junior Economists, Accountants, and Statisticians won't be given a GS-13 position out the door, but it's more likely for Cyber/IT roles due to the salary constraints.
I shouldn't have used such broad strokes, you accurately assessed that my opinion is based on my experience with IT/cyber folks in the government.
All good! The Federal Government is a massive employer and your experiences are heavily sub-agency dependent. No two people will have a similar experience.
There was an Odd Lots pod on this (from Bloomberg). Quite interesting. I didn't realize how many issues there are in the potential conversion from office to residential. A very small percentage of office builds can actually be converted.
July 6, 2023, "What It Really Takes to Convert an Office Building Into Apartments"
> Big cities like New York have two real estate problems. Housing is scarce and office buildings are empty (or at least under-utilized.) So there would seem to be an obvious solution: turn the offices into homes. And indeed there has been a lot of talk lately about "office-to-resi" conversions. But it's very hard, for a wide variety of reasons. Zoning, financing, and then, of course, the operational aspects of the construction all need to be in place. So what does it take? On this episode, we speak with Joey Chilelli, managing director at the Vanbarton Group, a firm that's been involved with these projects for a decade and long before the pandemic upended both real estate markets. We discuss the challenges involved in actually pulling off these complex projects.
* https://omny.fm/shows/odd-lots/what-it-really-takes-to-conve...
* https://www.youtube.com/watch?v=HNkLcD3PKyk
> Big cities like New York have two real estate problems. Housing is scarce and office buildings are empty (or at least under-utilized.) So there would seem to be an obvious solution: turn the offices into homes. And indeed there has been a lot of talk lately about "office-to-resi" conversions. But it's very hard, for a wide variety of reasons. Zoning, financing, and then, of course, the operational aspects of the construction all need to be in place. So what does it take? On this episode, we speak with Joey Chilelli, managing director at the Vanbarton Group, a firm that's been involved with these projects for a decade and long before the pandemic upended both real estate markets. We discuss the challenges involved in actually pulling off these complex projects.
* https://omny.fm/shows/odd-lots/what-it-really-takes-to-conve...
* https://www.youtube.com/watch?v=HNkLcD3PKyk
https://www.nytimes.com/interactive/2023/03/11/upshot/office... is pretty definitive; basically the newer the building, the harder (or impossible) it will be to convert, and even if it can be converted knockdown and rebuild might be faster or cheaper or both.
Another reason (than the ones listed): it's physically hard. Office buildings have to be essentially gutted, new utilities designed (heat/cooling/light/power/access) and rebuilt. Not as hard as building a new shell, but still a big chunk to bite off. And probably not quick, it'll take months.
> new utilities designed (heat/cooling/light/power/access) and rebuilt.
The biggest ones (from a $ perspective) are window access in the interior of the building, and water (clean and waste). To add windows to one building in NYC (I forget which one), they had to knock out the center. IIRC that wasn't cheap.
The biggest ones (from a $ perspective) are window access in the interior of the building, and water (clean and waste). To add windows to one building in NYC (I forget which one), they had to knock out the center. IIRC that wasn't cheap.
Seems like a waste, the most interior spaces could be storage for the units or just left empty, instead of knocking down something that might have some value later.
They can build an inner ring of apartments and sell them immediately rather than storage
[deleted]
No apartment without a window.
I'm positive a lot of people don't care a lick about windows...maybe we should reconsider their requirement. Especially if there are natural light simulators in the apartment
I think you're missing the power element. How many US office spaces have 240v outlets on all floors for driers and stoves? Those are kind of needed, at least stoves.
Existing programs appear too complex by focusing on "conversion". Government should just fund tear down of the existing office building and subsidize development of multi-family on these lots that had office prior.
The theoretical arguments against office conversion are overblown and too fixated on what the "perfect" or currently regulated apartment setup is... both of which are flexible. An apartment or condo doesn't have to be "ideal" to be viable.
But it is true that many don't know how or want to invest into figuring out how to do the conversions. Each project is unique and requires careful thought. Building multi-family on an empty lot is far simpler, and government can hand office lots to developers as if they were an empty lot.
The theoretical arguments against office conversion are overblown and too fixated on what the "perfect" or currently regulated apartment setup is... both of which are flexible. An apartment or condo doesn't have to be "ideal" to be viable.
But it is true that many don't know how or want to invest into figuring out how to do the conversions. Each project is unique and requires careful thought. Building multi-family on an empty lot is far simpler, and government can hand office lots to developers as if they were an empty lot.
That may generally be true, but that's a beautiful building shown in the article; I hope they don't tear that one down.
When we're talking about some glass-box office building though, then by all means, just replace it.
When we're talking about some glass-box office building though, then by all means, just replace it.
Why should government (ME) fund this?
It is basically a one time investment in shoring up the tax base. Not doing so may mean that residents are asked up to pick up more of the tax slack to fill budget holes.
Right so, me (not from New York) should invest in fixing New York through my federal tax dollars.
Considering that New York puts more in the revenues than it receives in federal dollars, probably. Otherwise rates will have to hike to make the difference.
Because ultimately the collapse of value, privately or publicly held, results in the collapse of the system that supports your value exchange system. This is overly broad, but im just trying to point out we are a part of a deeply interconnected system -- it's not just me-capitalism.
But I understand the counter -- why should the government fund private market screwups? And the terrible answer is -- because we suffer the consequences regardless.
There is a third question though which is: with the collapse of both retail, mutli-family, and office CRE, what in the world is the future of cities?
But I understand the counter -- why should the government fund private market screwups? And the terrible answer is -- because we suffer the consequences regardless.
There is a third question though which is: with the collapse of both retail, mutli-family, and office CRE, what in the world is the future of cities?
I think I do not get the article point much... For me conversions can't work for two reasons:
- converting existing buildings is more expensive then create new residential areas from scratch, city density and original totally different design simply makes such conversions a crazy idea;
- even if some buildings get converted who might want to live in them? Before the masses have tasted and so learned the WFH model downtown was a place to be to have interesting jobs, now they start to be a place to stuff poor people in social housing setups. Let's say those who have no choice accept, what they do to live? There are not much factories of tertiary sector jobs in the modern city, only city-services related jobs, and there are more "service consumers" than "service operators", so there is a growing slice of people unable to find a job.
- converting existing buildings is more expensive then create new residential areas from scratch, city density and original totally different design simply makes such conversions a crazy idea;
- even if some buildings get converted who might want to live in them? Before the masses have tasted and so learned the WFH model downtown was a place to be to have interesting jobs, now they start to be a place to stuff poor people in social housing setups. Let's say those who have no choice accept, what they do to live? There are not much factories of tertiary sector jobs in the modern city, only city-services related jobs, and there are more "service consumers" than "service operators", so there is a growing slice of people unable to find a job.
Sad that people will focus on the details of this problem but not step back and ask what incentives and macroeconomic conditions created the problem in the first place. We’ll get solutions that are worse than doing nothing, rinse repeat.
Its sort of like the student loan forgiveness thing to me. I certainly feel a lot of these people, maybe even most of them, got taken advantage of and screwed and maybe we should cancel the loans. But with no accompanying effort to prevent it from continuing to happen its a bit like treating a guy who is bleeding out by giving him a blood transfusion and pushing him out the door. Its expensive and only delayed the result.
In this case, we understand the cause of the problem incredibly well. Advances in technology reduced the amount of work that needs to be done in an office building; and a once in a century pandemic caused the resulting shift away from office building to happen much faster then it otherwise would have.
The risk was not “priced in” which is to say there were perverse incentives to develop offices that weren’t truly needed and a corporate culture that was shielded from the consequences of misallocating funds.
i have a fairly ill-informed question.
my sense is that office-to-residential just rarely makes sense. but could one change building codes so that, when new office buildings are constructed, they have to be designed to make a future residential conversion relatively cheaper and more feasible?
how much extra cost would this impose in the construction process? is it something that's relatively cheap/not that much downside, if only you plan ahead?
this solves no problems now but I am still curious about it.
my sense is that office-to-residential just rarely makes sense. but could one change building codes so that, when new office buildings are constructed, they have to be designed to make a future residential conversion relatively cheaper and more feasible?
how much extra cost would this impose in the construction process? is it something that's relatively cheap/not that much downside, if only you plan ahead?
this solves no problems now but I am still curious about it.
So the basic problem is that basic building design is a major stumbling block here. (I learned this from listening to the Odd Lots podcast cited below when it came out, so this is all from memory.)
Modern offices are designed to be big open warehouses, trying to maximize the number of desks you can fit into a space. Big square footprint with central core for restrooms, stairs and elevators has been the dominant paradigm here because it maximizes the number of desks you can fit into a given lot. But apartments want perimeter, everyone wants windows and massively more plumbing necessary to give every apartment its own bathroom. So big square footprint isn't how you want your apartment building to be- that floorspace in the middle isn't worth much.
The developer they interviewed had actually ripped the center out of a building to create a big open glassed-in courtyard in one of their buildings, to give them an outer and inner ring of apartments which all had some light. But that requires a lot of work and a lot of staring at structural blueprints to make sure that it won't fall apart.
Modern offices are designed to be big open warehouses, trying to maximize the number of desks you can fit into a space. Big square footprint with central core for restrooms, stairs and elevators has been the dominant paradigm here because it maximizes the number of desks you can fit into a given lot. But apartments want perimeter, everyone wants windows and massively more plumbing necessary to give every apartment its own bathroom. So big square footprint isn't how you want your apartment building to be- that floorspace in the middle isn't worth much.
The developer they interviewed had actually ripped the center out of a building to create a big open glassed-in courtyard in one of their buildings, to give them an outer and inner ring of apartments which all had some light. But that requires a lot of work and a lot of staring at structural blueprints to make sure that it won't fall apart.
The two biggest hurdles in doing office-to-residential conversions are:
1. The lease span (i.e., the distance from the core of the building to the windows) is typically much larger in an office building vs. a residential building (40ft vs 30ft).
2. The plumbing/mechanical services need to be increased/modified for a residential building.
Enforcing the first would essentially mean asking the developer to design a different building. It's possible that you could make an office building work without following conventional office layouts and leasing patterns (who knows, maybe there's more of an appetite for something different post-COVID), but it would involve a significant re-thinking on the part of the developer about how they will make money from a project.
The HVAC/plumbing issue could probably be something you could ask the builder to make accommodations for without needing to totally re-conceptualize the project.
1. The lease span (i.e., the distance from the core of the building to the windows) is typically much larger in an office building vs. a residential building (40ft vs 30ft).
2. The plumbing/mechanical services need to be increased/modified for a residential building.
Enforcing the first would essentially mean asking the developer to design a different building. It's possible that you could make an office building work without following conventional office layouts and leasing patterns (who knows, maybe there's more of an appetite for something different post-COVID), but it would involve a significant re-thinking on the part of the developer about how they will make money from a project.
The HVAC/plumbing issue could probably be something you could ask the builder to make accommodations for without needing to totally re-conceptualize the project.
Not an expert but know a little, good ole "it depends". Options for water and waste management, building size, occupation levels, etc. It would likely end up being fairly substantial to make every building dual use.
Well apparently it takes almost no office to housing conversion to move migrants into an office building next to where I work in Boston (under 2 weeks from what I can tell).
So that's your answer on the lower end.
https://www.boston25news.com/news/local/residents-bostons-fo...
So that's your answer on the lower end.
https://www.boston25news.com/news/local/residents-bostons-fo...
I can't read the article (maybe someone can post an archive link?) but I wouldn't be surprised if there isn't some implicit sabotage built in.
Checking the rates per square foot for residential versus commercial (office) space in my area, residential is going about $2/sqft but commercial is $20/sqft. So in addition to the cost of conversion, the rents would have to be cut by an order of magnitude.
Since the banks are on both sides of this equation (they probably hold loans against the buildings people are looking to convert, and they'd be making new loans to finance the conversion) I'm sure there will be some foot-dragging because of increased risk and higher loan values and longer loan repayment terms.
Checking the rates per square foot for residential versus commercial (office) space in my area, residential is going about $2/sqft but commercial is $20/sqft. So in addition to the cost of conversion, the rents would have to be cut by an order of magnitude.
Since the banks are on both sides of this equation (they probably hold loans against the buildings people are looking to convert, and they'd be making new loans to finance the conversion) I'm sure there will be some foot-dragging because of increased risk and higher loan values and longer loan repayment terms.
are you comparing monthly vs annual rent? commercial spaces are typically quoted annually.
[deleted]
[deleted]
Just another ill advised "solution" from this administration. What the drafters of this bill don't understand is you have a huge percentage of unlivable space in the middle of every floor(no windows!). There are building codes and one of the biggest is having windows in rooms. No city in America would allow that. In addition lets talk about plumbing, you need alot more plumbing going to each floor due to bathrooms(sinks, showers and bathtubs), and dishwashers and washing machines. Office space per floor has a fraction of this. Lets also talk about electricity and gas. Each "unit" would require gas and electricity needs which far exceed what is available in most commercial buildings. Having done extensive remodel work on houses I have owned there is a huge web of building codes that would prevent these comercial buildings from ever being converted to residential, I just can't imagine anyone in their right mind putting something like this forward.
> Each "unit" would require gas and electricity needs which far exceed what is available in most commercial building
A growing trend is banning gas in new builds, so that's one way to lessen the impact. But agreed with the larger point that it's a much huger lift than people tend to think.
A growing trend is banning gas in new builds, so that's one way to lessen the impact. But agreed with the larger point that it's a much huger lift than people tend to think.
So what's the solution since there is less demand for office space? Tear them down?
Less demand with same supply = lower prices. The owners either work with the lower prices or if they're so low that it makes sense to replace the office with something else that'd have better returns then that will happen. Pretty simple really.
So tearing down is cheaper than renovating? I'm not sure that's what you're saying but that's how I interpret it. Feels like an over-generalization to me.
If the Biden administration wanted to expand housing (lower housing cost) they would offer low interest loans to home builders and attach zoning-change strings to federal dollars given to states/municipalities.
But it's likely they don't really want to shake things up. High housing cost is primarily a problem in Blue districts, and Democrats hate losing asset value as much as anyone else.
But it's likely they don't really want to shake things up. High housing cost is primarily a problem in Blue districts, and Democrats hate losing asset value as much as anyone else.
> wanted to expand housing (lower housing cost) they would offer low interest loans to home builders
Not sure if you noticed, but the home builder have been able to borrow near infinte quantities of cash at ~0% for the last decade.
It did not expand housing or lower the housing cost.
Not sure if you noticed, but the home builder have been able to borrow near infinte quantities of cash at ~0% for the last decade.
It did not expand housing or lower the housing cost.
> It did not expand housing or lower the housing cost.
Unless we're losing 1.4 million dwelling units a year, housing is expanding: https://www.census.gov/construction/nrc/current/index.html
Maybe not as fast as we need/want, but it is expanding.
Unless we're losing 1.4 million dwelling units a year, housing is expanding: https://www.census.gov/construction/nrc/current/index.html
Maybe not as fast as we need/want, but it is expanding.
They need a place to build those houses.
Ok, so that's not the constraint. What's left on the list of possibilities to check off?
It is easier to make money by investing in expensive housing than investing in cheap housing. You can sell both, so why tie up your assets in something with less return?
I can think of at least three:
1. Land where people want to live.
2. Appropriate/different zoning.
3. Efficient/timely acquisition of relevant permits.
1. Land where people want to live.
2. Appropriate/different zoning.
3. Efficient/timely acquisition of relevant permits.
You forgot:
0. People who can buy the finished home
0. People who can buy the finished home
I’m not sure where you are, but here in central coast California, there are no shortage of these folks.
Supply is still much, much lower than demand, and my friends in real estate are grousing about it.
Supply is still much, much lower than demand, and my friends in real estate are grousing about it.
Yeah part of it is that a builder can't just spring out of nowhere, you need a certain number of skilled craftsmen hours to build a house (probably a craftsmanyear or so) and if they're all busy, it's not simple to make more.
> Democrats hate losing asset value as much as anyone else.
There's a reason for that. Home equity is one of the crucial pieces of being able to comfortably retire, and the largest component of most middle-class people's net worth.
There's a reason for that. Home equity is one of the crucial pieces of being able to comfortably retire, and the largest component of most middle-class people's net worth.
We'd be better off with more wealth in index funds, and cheaper houses.
When the British Empire wanted to reduce the value of an important asset, in that case by criminalizing it -- I'm talking about slavery -- they paid reparations to the "owners", basically to bribe them into accepting the change to society. We may likewise need to bribe homeowners to ram through the necessary changes.
When the British Empire wanted to reduce the value of an important asset, in that case by criminalizing it -- I'm talking about slavery -- they paid reparations to the "owners", basically to bribe them into accepting the change to society. We may likewise need to bribe homeowners to ram through the necessary changes.
We've shifted from a manufacturing to a service economy, hence the focus on moving unionization to that sector. Going from home ownership/pensions to... nothing as a retirement plan is a similar generational shift that political parties must learn to navigate (cheap housing, UBI, criminalizing homelessness, etc), but apparently not before the baby boomers dwindle.
Who designs these programs? Yeah, what bank in their right mind would sit around for up to 2 years (aka, until the next administration) to close on a loan? That's insanity!
The only orgs getting funding out of these programs are people who already have tons of cash on hand. So only existing real estate barons need apply.