Obsolescence Equals Opportunity_final (002)

Architectural Characteristics: One of the most significant considerations for conversions is the degree of architectural intervention needed to attract residents. Office buildings typically have larger floorplates making it difficult to bring natural light into the core of a building. Other building characteristics such as the shape of the physical structure, façade, ceiling heights, window placement and more create a challenging environment to transform office buildings for residential use. Floorplate / Layout: Loss factor, or the square footage lost to conversion, should be another consideration when evaluating potential assets for conversion. Office floorplates are generally larger and less efficient, and conversion may shrink the usable square footage considerably. Retrofit Costs: Costs to retrofit office buildings for residential use vary widely and are often the biggest hurdle in identifying sensible conversions. Estimates from $100 per square foot up to nearly $700 per square foot are common and vary based on the scope of work. Assets that need entirely new façades, extensive plumbing and HVAC retrofits, asbestos remediation as well as other capital-intensive projects will face more challenges. Acquisition Basis: If the basis for buying office space is low enough, conversions can remain competitive with ground-up construction. Chart 19 illustrates the cost basis for offices converted to high-rise multifamily ($127/sf) relative to high-rise multifamily property ($632/sf). The average price per sf paid for a high-rise office building to be converted since 2020 has been about 50% of the overall office market average ($234/sf) and 65% below the average multifamily high-rise price per sf. With high-rise Class A multifamily product selling for upwards of $630/sf office conversion product offers plenty of room for extensive conversion costs.

Meanwhile, alongside the waning impact of COVID on urban cores nationally, market conditions have become more supportive of additional housing. As seen in chart 18, multifamily occupancies took a significant hit during the depths of the pandemic, falling by more than 300 basis points in the CBD and 100 basis points in urban locations, whereas the suburbs only saw occupancy increase throughout the pandemic. Since then, CBD and urban core occupancies have more than recovered, with today’s occupancy relative to Q4 2019 ranking the highest in CBDs and urban locations, compared to that of suburban assets. 22

CHART 18: MULTIFAMILY OCCUPANCY 2019Q4=0

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

-3.0%

-4.0%

2021 Q1

2021 Q2

2022 Q1

2021 Q3

2021 Q4

2020 Q1

2019 Q4

2022 Q2

2022 Q3

2020 Q2

2020 Q3

2020 Q4

CBD Urban

Suburban

2022 Q4 QTD

Source: Cushman & Wakefield Research

What to consider in an office to multifamily conversion While building-level specifications are key to evaluating conversion candidates, market-level analyses come into play as well. Important property-level considerations for office-to multifamily conversion include:

22 CoStar and Cushman & Wakefield Research.

30 | OBSOLESCENCE EQUALS OPPORTUNITY

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