Week 3–The Changing Office Market…Into Condos??

July 2, 2014

I have bemoaned this anemic job recovery to no end. Without jobs, office space is difficult to lease. One outcome of this slow recovery is that owners and developers are getting creative with their buildings. Or, more likely, the new owners who bought the building from the bank that reposed the project are now redeveloping them. Over half of the space being removed from the office market is being returned as a condo or apartment.

There are two ways this is happening. I have previously sent out an email showing the top six or seven office sites in Phoenix that have been sold to apartment developers and are now being built. These projects took over 3,000,000 potential square feet of office permanently off the market. In Phoenix, we have had just a few over the past decade. The most notable is 3033 N. Central.

In big cities like San Francisco, New York and Philadelphia, developers are also taking old office buildings and converting them to cool apartments or condos.

Before we started the Lee & Associates Arizona office in 1991, I began my brokerage career at Grubb & Ellis. One of the most creative brokers I ever worked with was Brian Day O’Connor. One of the deals he spent a lot of time on was selling the Valley Annex Building at Central and Monroe. That was over 25 years ago. Fast forward 25 years, a number of owners, a couple bankruptcies and you have the building in the exact same condition it was when Brian was selling it. At the bottom, I have included an article on the latest announcement of guess what? You got it—almost. A developer is buying and going to convert the building into a hotel. I think the time is finally right–For this project. For conversion development, there is no wrong or right, rather project by project careful analysis is necessary.


P.S. My favorite North American city (outside metro Phoenix) is Vancouver. One reader suggested the pricing in that market has gone crazy with mainland Chinese buyers. Now only second to Hong Kong pricing. At the bottom, there is a great article on what is happening in that market.

Developers Increasingly Find It Can Pay To Convert Office Buildings Into Apartments and Condos
More than Half of Office Space Removed from Inventory Returns To the Market as Residential


By: Randyl Drummer
October 29, 2013

Office Buildings to Condos

Analysis presented at CoStar’s recent Third-Quarter 2013 Office Outlook and Forecast found that developers added 39 million square feet of new office space over the last four quarters. However, the net impact was muted as another 22 million square feet of office space was removed from the market, either demolished or converted into other uses, with more than half of that former office space being converted to residential uses such as apartments and condominiums.

“Clearly, we see a shift in how real estate is being used and what developers are building,” said Walter Page, director of office research for CoStar. “So far, over half of the office recovery has been driven by removals of space. We’re still at a very low level of [net] completions, due mostly to demolitions.”

Outdated office buildings nearing the end of their usable lifecycles have long been subject to the wrecking ball in favor of other uses such as upscale condos and apartments.

In the current cycle, however, developers are not just looking to demolish or convert lower-quality office buildings. They’re also repositioning higher quality office properties to meet growing demand for urban residential space, particularly in transit-oriented markets such as New York City, San Francisco, Chicago, Philadelphia, Baltimore and Washington, D.C.

The trend has been especially prevalent in Manhattan where planned conversions are a key component in some of the largest office transactions of recent years, including 650 Madison Avenue, which sold for $1.3 billion, or about $2,200 per square foot, and 550 Madison Ave., which Sony Corp. sold for $1.1 billion to an investment group headed by developer Joseph Chetrit that is exploring a conversion into luxury condos, a hotel and upscale retail space.

Abundant capital is available for office-to-residential conversions in submarkets where existing office buildings still suffer from vacancy overhang, noted James Murphy, executive managing director in Colliers International’s Investment Services Group. Residential condos in the same areas can command investment sale prices of up to $5,000 per square foot, far exceeding the going rate for even high-quality office buildings.

“In Midtown, you’re seeing some of these [4 and 5 Star] buildings in a ring around Central Park being converted [in condos] and going for sky-high pricing, targeted at the sometimes-New York foreign crowd,” Murphy said.

The majority of the office buildings being taken off line are older 1 or and 2 Star quality buildings that are no longer competitive, said Aaron Jodka, manager of U.S. research for CoStar forecasting and analytics company Property and Portfolio Research (PPR).

“In many cases, the better use is not as an office building, and that’s really weighing on the demand side of the market,” Jodka said, noting that opportunities to reposition and convert obsolescent office properties to housing and other products make this “a great time to be a value-add office investor.”

The office-residential conversion trend has also been a major source of transaction activity in Baltimore, Chicago, San Francisco, and especially, Philadelphia and Northern New Jersey.

Northern New Jersey’s overall office vacancy rate has continued to inch down this year, fueled by an uptick in demand for vacant suburban office buildings for residential conversions and other redevelopment opportunities.

“Vacant buildings considered functionally obsolete by today’s office users are likely to remain on the radar screen for potential medical, mixed-use, multi-family or assisted living conversions,” said Daniel J. Loughlin, managing director and Jones Lang LaSalle’s office brokerage lead in New Jersey.

In many submarkets of Baltimore, landlords continue to struggle with chronic vacancy that has led to an increasing number of obsolete office buildings, which are now being considered for conversion to apartments, noted according Patrick Latimer, JLL senior research analyst.

In Baltimore City, the conversions will change the CBD landscape by helping offset the vacancy holes left by large tenants, such as Miles & Stockbridge, who over the past several years shifted from second- and third-generation space along Baltimore and Charles Street to newly-renovated Five Star product along Pratt Street. Over 800,000 square feet of office space has been removed from inventory in the Baltimore CBD for residential conversions in the last year.

Downtown Baltimore, however, may see the largest changes in 2013 as planned residential conversions could reduce vacancy by over 2% and spark the transformation of the traditional office oriented CBD to a mixed-use environment. The success of such projects as 10 Light Street, where Metropolitan is turning a 435,000-square-foot office building into 445 apartment units, may serve as a barometer for the viability of conversions for downtown office landlords, Latimer said.


Downtown Phoenix Art-Deco High-Rise Will Get $40 Million Makeover

ENR Southwest
By: John Guzzon
February 13, 2014

The 13-story Art Deco Professional Building at Central Avenue and Monroe Street in the heart of downtown Phoenix has been sold to CSM Corporation and will be converted into a premium select-service hotel.

Phx Art-Deco High Rise
Image courtesy CSM Corporation
Rendering of the Professional Building at Central Avenue and Monroe Street in downtown Phoenix

The building originally opened in 1932, housing the offices for Valley Bank and Trust and the Maricopa County Medical Society above. It is traditional Art Deco style with strong vertical lines, a central tower with setback wings and windows, and decorative grills above the main entrance. at Monroe Street and Central Avenue. The building was immortalized in Alfred Hitchcock’s iconic 1960 film, Psycho. In 1993, the Professional Building was included on the National Register of Historic Places and was vacated in 2000.

An earlier planned restoration failed with the bankruptcy of the project’s primary lender, Mortgages Ltd. It was due for completion in 2008.

The CSM restoration project is currently budgeted at $40 million, and is planned to include renovation of the exterior, installation of new insulated windows, new mechanical, electrical, and plumbing systems, and full renovation of the former bank lobby. It will include a lobby bar and coffee shop. The facility will comprise 165 guest rooms on 12 floors, 5,000 square feet of meeting space, a 1,300-square-foot fitness center, a business center, a rooftop terrace, and parking. The plan also includes about 8,000 square feet of retail space along Central.

Completion of the project is scheduled to be completed in time for the National Football League’s 2015 Super Bowl.

The 13-story Art Deco structure opened in 1932, housing the offices for Valley Bank and Trust on the three lower levels, and the Maricopa County Medical Society above. Its classic Art Deco style is reminiscent of the period with its strong vertical lines, central tower with setback wings and windows, and decorative grills above the main entrance at Monroe Street and Central Avenue.

According to CSM, the company is currently in negotiations with potential tenants and is exploring partnership possibilities, including branding options such as Hilton and Marriott. CSM expects the opening of the hotel to add 105 jobs to the downtown Phoenix marketplace, and its construction is expected to create 106 jobs. In additional to the $40 million project price tag, the overall economic and fiscal impact to Phoenix is estimated at $18 million, according to a study by Elliott Pollack.

CSM’s hospitality management, ownership, and development division owns and operates 39 hotels throughout the United States.

“Our company has a particular love for bringing landmark properties back to life, transforming them into hotel space the public can enjoy, and providing a future of commercial viability,” Bill Upshaw, president of CSM Lodging, said in a press statement. “CSM Lodging feels this property is ideally situated to be converted to a premium select service property, which is currently missing from the downtown market.”

Vancouver’s Skyrocketing Housing Prices: Are Mainland Chinese Investors To Blame?

Int'l Business Times

December 17, 2013


Vancouver skyline Shutterstock.com

Vancouver 2 2

Vancouver, Canada Reuters

Vancouver, the gleaming city in British Columbia in far western Canada, boasts the highest real estate prices in North America, and second-highest in the world (after only Hong Kong), according to a study by Demographia International Housing Survey, a housing pricing service.

For example, the average house in the wealthy West Side district of Vancouver clocks in at C$2.1 million (US$2 million), second only to Hong Kong. Over the past five years, the average price of detached properties on the West Side has soared by 45.3 percent, according to the Real Estate Board of Greater Vancouver. On the city’s less affluent East Side, the average price for a home is still a hefty C$850,000, having surged by 35.2 percent over the past half-decade. In Vancouver’s suburbs, including such satellite towns as Burnaby and Richmond, prices of single-family detached homes have jumped by 24.4 percent to C$922,600 over the past five years.

Much of the blame (or credit, depending upon one’s perspective) for Vancouver’s skyrocketing housing costs has been directed at deep-pocketed immigrants from mainland China who have poured into British Columbia in recent years, buying up luxury properties en masse. Joy Mo, 42, a Chinese-born Vancouver-area resident for 11 years, is one who blames wealthy investors from mainland China, shunting off prospective buyers like herself. “I’m quite disappointed,” she told the South China Morning Post of Hong Kong. “This is a place for all of us, and if you drive all the local buyers out of the market, what is the community going to be?” Mo and her husband are renting a home in the suburb of Port Moody, about 20 miles east of Vancouver, after having sold their home in 2008 (just before the huge spike in local property prices). Now, they find it impossible to afford a home in Vancouver proper again.

But she won’t blame all Chinese immigrants for Vancouver’s soaring housing costs. “Most immigrants who came here before 2008 or 2007 were mostly independent immigrants who came here with certain technical backgrounds,” she said. “They tried to find a job, settle themselves here. But after that, all of a sudden, there are a whole bunch of investor-category immigrants. Those are the ones that have a lot of money. They are generally not working and they don’t really care about finding a job because they have a business back in China.”

Indeed, literally tens of thousands of millionaire “investor-class” migrants from China have entered Canada simply by loaning C$800,000 (US$750,000) apiece in cash to the local provincial government – interest-free for five years. (That federal program ceased in 2010, according to the Globe and Mail, due to criticism and a huge backlog of applicants). Over the past eight years, almost two-thirds of the nearly 37,000 “investor-class” migrants who settled in British Columbia originated in mainland China. (Adding migrants from Hong Kong and Taiwan, that proportion climbs to 81 percent).

Mo said she was shocked by the attitude of Chinese in Vancouver who thought real estate prices in the area – where individual homes can cost as much as $4 million or much more — were “quite cheap.” “I just gasped,” she stated. “These numbers are just nothing to them, and I don’t understand why they don’t pay income tax and only pay the same property tax as everybody else. I don’t think it’s right. Our politicians overlooked this or don’t think that it’s a big deal… There’s a loophole here.” Mo said that when she and her husband applied to purchase a home in Vancouver, they were outbid by a Chinese investor.

To alleviate the problem, Mo suggested that foreign home-buyers in Vancouver should be subject to higher property taxes. The 15 percent levy that Hong Kong slaps on foreign buyers might be a good idea for Canada, she thinks. “I’m not sure [such a tax] would actually push the real estate prices down, but at least [offshore buyers] would contribute a little bit more to society,” she said.

Citing data from Landcor Data Corp., the South China Morning Post reported that in 2010, among purchases of luxury homes and properties in Vancouver’s West Side district, as well as the satellite city of Richmond, an overwhelming majority (74 percent) involved buyers with mainland Chinese surnames.

Julia Lau, a Vancouver real estate agent, told the paper that the actual figure is closer to 80 percent, but she views the influx of Chinese money as a boon. “I see a lot of [local] people here who bought in West Vancouver a long time ago, they can sell for a lot of money and move somewhere else outside Vancouver,” she said. Moreover, Ming Pao, a Vancouver-based Chinese-language newspaper, reported that mainland Chinese and second-generation Chinese are the largest buyers of homes valued at $4 million or above in the region.

Thus, the lofty price of housing in Vancouver has far outraced the pace of household income. Put another way, the RBC Housing Trends and Affordability Report determined that in Vancouver it now requires more than 84.2 percent of pre-tax household income to service the cost of owning a home in the area. The comparable figure in Toronto is 55.6 percent, and in Montreal, only 38.3 percent.

However, since it is impossible to obtain exact data on foreign ownership of Canadian properties, the sentiment that Chinese buyers are driving up home prices is largely anecdotal, cautions Craig Alexander, chief economist at TD Bank Group in Toronto. Alexander said foreigners buying Vancouver properties is only one of several factors pushing up local prices. In a telephone interview, Alexander explained that Canada avoided the worst excesses of the global financial crises and emerged largely unscathed during the recovery, making it an attractive place to invest in. “Canada has also enjoyed low interest rates and low fixed mortgage rates, all of which provided a strong incentive for people to buy houses,” he said.

Vancouver, he added, has many appealing qualities for both foreign and domestic home buyers. “It is beautiful, clean, safe and has a very mild climate,” he noted. “As far as Asians are concerned, Vancouver is easily accessible from the Pacific Rim, more so than, say, Toronto or Montreal. Plus, Vancouver already has a large Asian community established, enabling friends and family from overseas to settle there.”

Meanwhile, Vancouver Mayor Gregor Robertson has denied that local home prices are jumping thanks to mainland Chinese investors, adding that the Chinese have brought a “great influx of talent and culture” to his city. “We don’t want to take any rash actions that might impact investment in the city,” he said, according to the Canadian Broadcasting Corp. “We’re not Hong Kong. They saw real estate prices rise 26 percent last year, which is unbelievable – they had to take rash actions to deal with that.”

But Robertson conceded that Vancouver housing price tags have indeed increased too high, too fast. “There are warning signs that we have to watch very carefully, and we may have to take action in the future if it’s warranted,” he added.

The Post noted, however, that unlike the enmity against mainland Chinese in Hong Kong, there appears to be little backlash against mainlanders buying up Vancouver properties and driving up prices. “It is mostly a mystery to me why more people in the Canadian media do not look more closely at how high immigration and foreign ownership affect the property market,” said Douglas Todd, a columnist for the Vancouver Sun. “That said, journalists are like most ‘nice’ Canadians and are very fearful of offending any ethnic or immigrant group.” Todd added: “I occasionally get accused of writing articles in which hyper-vigilant people say they detect an ‘undercurrent of racism’. They say ‘undercurrent of racism’ because they can’t find any actual racism, because it’s not there.”

Jillian Kohut, an economist at IHS Global Insight in Toronto, suggested that many foreign (that is, primarily Chinese) investors may be buying up properties in Vancouver simply as an investment. “Anecdotally, we have seen Chinese buyers purchasing houses and then letting them fall apart and become dilapidated,” she said in a phone interview. “Ultimately, the real value is in the land, not in the houses. I suspect that what’s really driving this are internal factors in China itself, which is compelling wealthy investors to park their money elsewhere, especially Canada, which is viewed as quite a stable and attractive place to invest.”

The Vancouver Condo Report speculated on what would happen to the local condo property market – already heavily leveraged to Chinese buyers – if and when China’s own precarious housing bubble pops. “If the Chinese housing bubble does burst, Chinese buyers who have invested in Vancouver condos will likely liquidate to shore up assets at home,” the report stated. “But because these buyers have pushed up prices beyond the reach of local buyers, there’s no local market for their condos. Prices will have to drop significantly, and that will mean heavy losses for both the Chinese investors and the developers catering to this market.”

VCR warns that with such a large portion of the local housing market dependent on one source of buyers, speculation places a “huge burden” on Canadians homebuyers. “Households priced out of a market will have to increase their commute time to find affordable accommodation,” VCR predicted. “The result is increased urban sprawl, increased pollution, increased taxes and a deteriorating quality of life.”

Alexander, however, pointed out that making forecasts about Vancouver’s housing market is rather compromised by the fact that there is apparently so much foreign ownership in the region. “Foreign money is not affected by domestic interest rates or most other domestic fundamentals,” he said. “Foreign investment works rather like a wild card in this scenario.” Still, Alexander believes that Vancouver properties are clearly “overvalued,” but it’s too early to call the market a bubble yet. “You really can’t identify a bubble until it has burst, but I think there are some concerns that the market is overheating.”

Kohut of IHS said threats of a bubble in Vancouver were probably greater two or three years ago, adding that the risks have likely waned since as the pace of property price growth has slowed. Indeed, she noted for example that most measures of property values on Vancouver (including the MLS Home price index) actually declined for several months in 2012. “Prices have actually backed off a bit, which tells me the threat of a bubble burst has eased up,” she added.




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