I was in Phoenix this weekend visiting my mom – and there was a very nice commercial office building behind my motel…that was completely abandoned (photos at bottom of blog).
It was surprising because the building looked to be in good condition and relatively new, but the landscaping was dead and overgrown and the bottom floor windows had been broken out.
So, the building was turned into residential, but just not the type we expected; the homeless had broken in and turned the ground floor into makeshift dwellings – and I am pretty sure they are not paying rent (I could be wrong though).
I would bet dollars to donuts too that the building was close to full occupancy prior to COVID.
America’s Offices Will Just Be Converted to Condos – And We’ll All Be Saved!
The myth we hear over and over is that all of America’s excess commercial space will just be converted to condos – and it will be a boon for everyone.
America’s housing shortage will be solved – and agents and lenders will have millions of more condo units to sell and finance. Woohoo!
BUT… probably not.
Ken McElroy Explains Why It Won’t Work
Famed real estate investor and YouTuber Ken McElroy explains why these mass conversions simply won’t work in this video: Insider Exposes Truth Behind Office-to-Apartment Conversions (Vital Understanding).
Most of America’s empty offices are not the big high-rises we see in cities; they are instead the smaller 20,000 to 100,000-square-foot class-B buildings we see everywhere.
McElroy explains that it will just be far too expensive to convert commercial office buildings into appealing residences that will either sell or rent for enough to justify the cost.
It will be far cheaper in most cases to just buy an actual residential condo building or to build one from the ground up.
The massive costs of conversion include (1) reconfiguring floor plans into residential units that all face outside; (2) reconfiguring plumbing so each unit has bathrooms and kitchens (very hard with cement floors); (3) changing windows so they open; (4) adding common amenities like gyms, green areas and pools; (5) creating residential parking; (6) setting up a functional HOA; (7) making the exterior of the building visually appealing for residential; and (8) getting a city to change the zoning to residential.
If there were no competing units in an area, this might all work. But – there will almost always be competing units somewhere nearby.
There is also the issue of financing. Good luck finding a bank to take a chance on one of these projects.
What Does This All Mean?
It means that both the commercial real estate and banking crises will likely get much worse, as the banks are all exposed to these commercial buildings – many of which will be worth more torn down than standing.
It won’t be as bad as the 2008 meltdown, but it could approach the impact of the late 1980s S&L Crisis – and that of course helped usher in a recession and … wait for it…much lower rates.
WARNING! Boomer-photos below!
I took the below photos very quickly while out walking yesterday in 137-degree (give or take) Phoenix heat, expecting to only share them with my brothers (and before deciding this was blog-worthy).
The photo below includes a finger that conveniently points to a window that was broken out – for a “residential conversion.” The next two photos show the size of the building and the state of the landscaping.
