Column: The Inevitable Conversions Start Multiplying
By Tom Elijah
It’s a phenomenon from New York to Dallas to Fresno to Los Angeles that seemed inevitable to some as millions of Californians became the first Americans ordered to work from home to help combat the spread of COVID-19.
This pandemic is not over yet, although the public is fed up with it. Covid’s viral variants are still haunting the world as their third winter of plaguing people begins to wane.
But millions of employees who have had a taste of setting their own hours and creating their own work environment are still reluctant to return to the office more than once or twice a week. As a result, vacant office buildings now cover hundreds of millions of square feet in California alone.
The empty offices made it clear from the first onslaught of the pandemic that housing remodeling would become an important part of the solution to California’s housing crisis, if not its predominant response.
Now that is becoming a reality, the only inexplicable thing about it is the fact that it has taken three full years to go from an obvious concept to a grand reality.
The conversion of office buildings has become so real:
Website rentcafe.com reports that more than 4,130 apartments and condos will be built from office space conversions this year in Los Angeles alone. More than 1,000 new units are planned in Fresno this year, more than 500 more in San Francisco, 450 in Sacramento and about 200 in Oakland. Even cities that have never gotten into this game are now active in remodeling: 372 remodeled units are slated to open in Alameda this year, 250 in San Clemente, and 250 in the San Pedro neighborhood of Los Angeles, not in the announced total of city counted.
A total of at least 10,000 new residential units in former office space will be opened this year.
None of these conversions will be very controversial as they do not occupy new floor space, do not alter existing neighborhood views and profiles, and therefore do not provoke the environmental lawsuits that delay so many California construction projects, including a major addition to the State Capitol.
Surely many more units will follow, especially if this year’s already approved crop brings in significant rents and purchase prices. That’s almost certain, as new units range from street-level apartments, with significant outside noise, to penthouses with sea views.
The number of units running debunks naysayers who claimed, when the idea first surfaced shortly after Gov. Gavin Newsom issued the country’s first home bans in early 2020, that remodeling was more difficult to approve and build than new construction.
That’s not true, especially since the state passed a law last fall that makes such permits virtually automatic when they’re applied for.
Objections that office layouts were wildly different from residential buildings were quickly dispelled as the necessary plumbing and electrical changes, as well as moving drywall within existing interiors, proved less complex than some had anticipated.
Moreover, the conversions are already becoming a fiscal boon for struggling local governments, whose property taxes have begun to fall as office building vacancy rates remain high. Also, as office rental income declined, estimated valuations could control the amount of property tax money going to local schools, sewer and water districts and other local governments.
But if the converted units are sold, they are subject to Proposition 13’s 1 percent tax on the final purchase price of a property. While business tax rates tend to remain relatively stable for decades, residential taxes can rise quickly as units change hands.
At the same time, conversions are beginning to bail out real estate funds, whose office rental income has fallen, as have the dividends they paid investors. All of this happens when former office space finds a new, productive use.
Bottom line: Office remodeling, first recommended by this column in April 2020, is now the wave of the future in California and elsewhere, and it’s a boon for everyone from first-time homebuyers and renters to real estate owners and local governments.
Email Thomas Elias at tdelias@aol.com. His fourth edition book, The Burzynski Breakthrough, The Most Promising Cancer Treatment and the Government’s Campaign to Squelch It, is now available in softcover. For more Elias columns, visit www.californiafocus.net.