Fact or fiction? – Multifamily real estate news
So far, it’s been mostly hype, according to Julie Whelan, global head of occupant research at CBREwho reported during the recent National Association of Property Publishers conference in Atlanta that between 2016 and this year, only 35 properties per year were converted to apartments or other uses.
But many more conversions are in sight, Boston-based Whelan added. And other panel members with her agreed.
“The jury is out yet” just how overstretched the office market is now thanks to the pandemic and the resulting work-from-home movement, said Ed Cross, a developer who is transforming the 31-mile Tower Life tower. floors in San Antonio. downtown into a mixed-use property.
In his own city, Cross told the Nationwide Meeting of Real Estate Writers, office buildings are 85% leased but only 20% occupied.
But even if the industry is only 20% overstretched, Cross added, the market can’t absorb more than 7%, leaving the remaining 13% to the founder and lenders to hold the bag. Only if lenders sell low to avoid foreclosure, he said, will developers like Cross & Co.. begin to use their ingenuity.
Many buildings are becoming obsolete because tenants are downsizing and moving into new Class A structures, leaving their old buildings with very little chance of filling the vacant space, noted panel moderator, journalist Jon Banister of Bisnow.
“Sometimes buildings are worth less than the land they cover,” Cross said. “If lenders sell to anybody with money, that’s when we can get really creative…. Some lenders won’t sell for any number, but they really should. Lenders must decide how much pain they are willing to endure.
Douglas Cameron of Cameron Management, a Texas-based company that is converting the Esperson office building in downtown Houston into residential rental housing, agrees with that assessment. Foreclosure is a word we’re going to start hearing again unless the banks become very motivated to do something lest they end up owning underperforming buildings.
“Once lenders start collecting rent themselves,” Cameron warned, “their properties will lose even more value.”
Fortunately, said Jamie Woodwell of Mortgage Bankers Associationfrom Canada’s research and economics group, lenders have a “new experience” in dealing with real estate left over from the Great Recession. “They will react a lot and lean on people who give them good ideas.
“Some lenders are getting their hands on their issues and the strength of the multifamily market bodes well.”
Cross went further, saying that “very big equity” will be willing to wait the three or four years it will take before their investments start paying off.
Of course, to do conversions at work, local government has to cooperate, and “this is where it starts to get tricky,” Whelan said. “The government needs to be responsive. Developers won’t be able to do what they want without it.
But Cross thinks the cities will be at least somewhat welcoming. “Cities are going to start doing the math, and when they do, they’ll realize they’ll have to partner with developers to preserve their property tax revenue.”
The alternative, of course, is to tear down older, underutilized structures and start from scratch. And while Cross said some properties, especially suburban apartment buildings with huge parking lots, would be ripe for demolition, that’s likely to be the exception rather than the rule.