Imagine an office building standing proud but empty, a relic of its industrious past. Now, picture that same space revitalized into a thriving residential hub, teeming with life and activity. Intriguing, isn’t it? That’s the power and potential of residential conversions, a strategy transforming the face of the Californian real estate landscape.
In California alone, Covid-19 led to a record-breaking vacancy rate of 19.4% in downtown LA office buildings as of 2021, according to a report from CBRE. As the traditional office model grapples with a new era of remote work, these empty spaces offer an exciting proposition. But it’s not just about filling space—it’s about addressing the persistent housing shortage in our cities, and more importantly, it’s about the allure of a potentially high return on investment.
Key Reasons to Consider Upgrading
California’s housing crisis has reached a critical stage, with a shortage of approximately 3.5 million homes, the highest deficit in the nation. This shortfall pushes rents and house prices to unattainable heights for many residents, exacerbating homelessness and stifling economic growth. One innovative solution to this challenge lies right before our eyes: the unused office spaces scattered across our cities.
Transitioning from commercial to residential use can be a win-win solution that addresses this crisis and offers substantial financial rewards. Here are some key reasons why:
- Addressing Housing Shortages: California had the nation’s most significant shortfall in 2019, with a shortage of 978,000 homes. A lack of new home construction, notably in nearshore metropolitan regions, is a substantial reason for the state’s housing crisis. Converting commercial spaces into residential ones directly addresses the urban housing deficit.
- Financial Returns: Despite the initial conversion costs, the high demand for housing in urban areas, particularly in California, makes this a lucrative investment; thus, these conversions can offer considerable ROI.
- Preservation: In many cases, conversion allows for the conservation of historic and architecturally significant buildings that might otherwise deteriorate or be demolished.
- Sustainability: Repurposing existing buildings reduces the environmental impact of new constructions, aligning with global sustainability goals.
- High-Interest Among Urban Dwellers: Urban living attracts many people, especially younger people, who appreciate its convenience and lifestyle. Residential units in city centers can command premium rents.
- The Topaz Building, San Pedro: This 12-story, 292,540-square-foot office building with views of the Pacific Ocean is slated to be converted into 228 studio, one- and two-bedroom apartments, with balconies in 70% of the units and a rooftop amenity deck with resort-style pool.
- Pier 70, San Francisco: Once a sprawling shipbuilding complex, Pier 70 is undergoing an incredible transformation. This waterfront space is being reinvented as a mixed-use development, offering housing, retail, and office spaces.
- The Cannery, Davis: What used to be an industrial plant is now a vibrant residential community. The Cannery’s transformation includes urban farms and community amenities, offering its residents a sustainable, community-oriented lifestyle.
California offers several incentives for commercial property owners looking to make upgrades:
- Tax Increment Financing: This allows municipalities to invest in infrastructure improvements by borrowing against future property tax increases resulting from those improvements.
- Real Estate Tax Abatements: These can offer significant savings for property owners looking to make improvements.
- Job Credits: For projects that create jobs, particularly in specific sectors or areas, tax credits may be available.
- Energy Efficiency Incentives: Making your property more energy-efficient can save money and make you eligible for various state and federal incentives.
How to Get Started
If the potential of residential conversion has caught your interest, here are a few initial steps to get you started:
- Conduct a Feasibility Study: Complete a thorough property analysis to determine its suitability for residential conversion. This should include evaluating the building’s structural conditions, location, and potential market demand.
- Familiarize Yourself with Regulatory Requirements: Acquaint yourself with zoning laws and building codes that apply to the conversion process. You may need to seek special permissions or variances to allow residential use.
- Determine Budgeting and Financing: Understand all the costs associated with the conversion, including construction, permits, and ongoing management. Remember to factor in potential tax incentives and financing options.
- Explore Design and Planning: Work with an experienced architect or builder who understands the challenges and opportunities of converting office spaces into residential units.
- Build a Team: Assemble a skilled team that can manage the project from start to finish. This may include lawyers, architects, contractors, and property management professionals.
Let’s talk numbers. A payback period is how long your investment takes to pay for itself. So, when will you see a return if you’re investing in a residential conversion?
Typically, real estate investments have a payback period of 10 to 15 years, but residential conversions alter this norm. Given the high demand for housing and the potential rental or sale income, a well-executed conversion in California could see a payback period closer to 5-7 years.
So why is residential conversion a good idea? High demand for housing and the attractive ROI make conversions enticing. Plus, there’s the added satisfaction of preserving a piece of history and contributing to your community’s growth.
There’s magic in transforming old, vacant spaces into vibrant residential habitats. But beyond the romance, there’s solid business sense in it too. With high returns, shorter payback periods, and potential tax incentives, residential conversions are a compelling strategy for any savvy investor in California.
At Evoque Lending, we are ready to be your partners in this exciting journey of breathing new life into old spaces.