Conversion Conundrum
/Any market seeks a balance between supply and demand. In New York City, a great example of this is the latest craze that has developers converting old office buildings into luxury residential complexes. These old buildings, full of character from an era past, have been highly sought after to live in. However, there has been a strong influx of young companies looking for swanky space. The office demand has become so strong that developers have begun to take note, and the pendulum is swinging away from residential and back towards office.
Planners and city government are mildly concerned about the shifting balances. They agree, without question, that adequate office space is essential but also recognize that an appropriate amount of housing needs to be available. In the past decade, they had plenty of housing but not much office space. Now the worry is there might be enough office space but not enough housing. The relationship of prices between office and residential will likely keep the supply of each somewhere around the equilibrium, but this rapid shift is taking developers by surprise. To illustrate, consider the private equity firm Savanna. In 2012, they acquired two office buildings with the intent of converting them into upscale residences. They expected to command a rent of approximately $60 per square foot. Recognizing the shifting market however, they ultimately decided to keep the buildings as office space and are able to get upwards of $70 per square foot.
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