The Feasibility of Brown Office to Green Multifamily

Plenty has been discussed and written about on the topic of office-to-multifamily conversions. Plenty has also been discussed about the pros and cons of such an action. In their National Bureau of Economic Research paper entitled “Converting Brown Office to Green Apartments,” authors Arpit Gupta, Candy Martinez and Stijn Van Nieuwerburgh (who coined the term “doom loop” to discuss how the collapse of office could create havoc in urban economies) discuss the potential for such conversions, while acknowledging that a small percentage of urban buildings might be eligible for a brown-to-green conversion.

The Theoretical Benefits

Similar to other office-to-apartment conversion arguments, the authors point out the benefits, which include:

• Housing affordability and scarcity

• Continued slow demand for commercial office space

• Climate change hazards

• Ongoing “urban doom loops” consisting of office underutilization, a decrease in retail sales and lower property and sales taxes

Additionally, “when faced with lower cash flows, existing office owners will struggle to afford the greenhouse gas emissions fines and lack the resources to invest in retrofits” that could improve building energy efficiencies, the authors explained.

All Are Not Chosen

But, the authors acknowledged that not all office buildings are feasible converts into green multifamily units. In developing a sample of “plausible office conversion candidates” in New York City, the authors used the following algorithm to focus on buildings that:

• Are in midtown and downtown Manhattan

• Were developed before 1990

• Are lower in quality (for office usage)

• Are larger than 25,000 square feet

• Offer shallower floor plates

* Have no or few major long-term leases

In extrapolating the NYC data nationwide, “the selection algorithm leaves us with a final, national sample of 2,644 properties whose physical attributes, remaining office tenants, and greenhouse gas emissions make them ripe for conversion to green apartments.” Specifically, the buildings represent approximately 11% of all office properties in high-density urban areas, at 214 million square feet.

The authors add additional information models, like a before-tax IRR of the conversion to the developer, yielding a projected IRR of 16.8%.

Yes, But . . .

The authors suggested that developers not go forth alone on such conversion projects. Instead, local municipalities should be flexible with zoning requirements while offering direct subsidies. Meanwhile, the federal government could help through renewable energy tax credits and affordable housing developments. “The surge of remote work has introduced a unique challenge for policymakers,” the authors explained. “Yet it also provides them with a unique opportunity to promote a once-in-a-generation investment in the urban environments of the future.”