The Hard Reality of Property Conversion

New York Gov. Andrew Cuomo recently called for a change in regulations to permit commercial property owners to convert their buildings to residential uses. Lost in the fanfare of his announcement, however, was the hard reality of the many challenges facing redevelopment. Real Capital Analytics’ Jim Costello points out that cutting red tape isn’t the only factor limiting conversions. Repurposing a building is costly, and the only real way to make it pencil out is to buy the asset at a discount.

“A redevelopment that prices an office building at the discounted value of future rental income for the building just cannot get off the ground,” Costello writes. “The times when it has made sense in the past to remove office buildings from market inventory for redevelopment are generally when the price cycle moves against the office sector.”