Corona Daily 075: Turning Boardrooms into Bedrooms

What was suspected a year ago is now reality. Some big names in America and Europe are giving up their office space. JPMorgan Chase, Ford, Salesforce, Target are reducing their real estate. The CEO of JP Morgan Chase, the largest private employer in New York City, said the bank will keep about 60 seats per 100 employees. United Airlines is giving up 150,000 sq feet at Willis tower in Chicago. Salesforce is subletting 225,000 sq feet.

What is going to happen to all the surrendered space in New York and London? The plan is to convert the office space into residential housing.

*****

Three types of conversions are planned. Offices into residences. Hotels into residences. And hotels into offices. The last category is about renting or leasing hotel space for staff to meet or to use as a co-working hub.

Converting office buildings into residential is an architectural challenge. Office building floor plates are usually large and deep to provide layout and partitioning flexibility. Elevators may need to be ripped off. A fat office building’s interior may be too dark and airless for someone to live in. Natural light and ventilation, fire and smoke protection, plumbing, electrical installations, an energy efficient wall-to-window ratio are matters that make the conversion challenge daunting. Other than architecture, it will be good for the new housing block to have grocery stores and public transport nearby.

*****  

The office building can be demolished and a new residence block built. That seems like a solution. But usually excavation, foundations, superstructure and elevator shafts account for 30 to 40% of the building’s value. Preserving them saves a lot of money. Moreover, in many places regulations don’t allow change of façade.

For a developer, this is expensive. He must pay for the acquisition of the building and for its conversion. In current times, it is not easy to organize finance. The governments are keen to convert the offices into affordable housing.

In the past, offices and hotels were turned into luxury residential complexes. The 22 floors of New York Telephone Company were transformed into 156 condos, each priced at $4.5 million. The Bank of New York and New York public library at 61 Rivington are now residential.

The suggested solution is that the government should buy the distressed commercial buildings and then give them to developers for conversion.

*****

UK has a law called PDR (permitted development rights) where converting offices or shops into residences doesn’t require planning permission. This has proven to be controversial, because people living in former shops are stuck with big floor-to-ceiling windows and fully glazed doors. They have little privacy, overheating in summers and freezing in winters.

Recently, in Leicester’s shopping street, a developer planned to convert a chip shop into single room flats of 7.7 sq meters. That would be about 9 feet by 9 feet, with the resident barely moving inside. The UK government has now modified the law to prescribe 37 sq meters as a minimum for a converted one-person home, and 50 sq meters for two people.

In London and other English cities, availability of commercial space rose by 30%, in New York by 17%. In Manhattan, rents have dropped by more than 10%. Value of office space has gone down by 25%. In the last thirty years, such availability has never been seen.

*****

Landlords are genuinely worried. By law, they couldn’t evict tenants or leaseholders. But the bills are mounting. In New York, hotels have not paid $1.8 billion, in Chicago $1 billion. Sixty American hotels sheltered 9500 homeless people during the pandemic, which was noble, but it hasn’t helped their balance sheets. The New York governor is worried because commercial property accounts for 41% of the property taxes.

Some people compare the situation with the Spanish flu epidemic. By 1923-24, everything was normal. However, 100 years ago, there was no internet. The last year has shown work can be carried on without a large office building. Back-of-the envelope calculations show 3% to be the expense on real estate. Many companies plan to reduce office space by 35% and simply transfer the saved 1% to the bottom line.

In the pandemic, homes are getting converted into offices. Now we know the reverse is also true.

Ravi