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Commercial Market Will Not Benefit From Conversion Permits

How to save Commercial office and retail marketsegments from large defaults? According to Trepp, The CMBS delinquency rate rose modestly in January, increasing 15 basis points to 4.66%.

I previously thought that in many cases if the city wil lissue permits to convert the office buildings to residential condos, that will solve the issue.
Unfortunately, that was not the case, and after crunching the numbers, I realised that the conversion does not make financial sense due to replanning, material and labor costs.

Here is why:

1. Typical multi floor office building will require separate and improved plumbing to each office. Most offices have a common bathroom on each floor. Even if bathrooms are per office unit, installing plumbing to put in showers is expensive.

2. All windows will need to be replaced. Typically, offices will have fully closed or partially closed windows, those will need to be replaced for residential use.

3. Common areas in office buildings will need re-subdivision. Most offices have a heated, maintained common area that has a high cost to office building. Now with subdivision, the unit owners will have to pay a high association dues to maintain the same.

4. Elevators and stairs will have to be redone to sustain increased traffic and new fire escape patterns. Roof and Elevator maintenance will also be a part of COA dues.

5. Flooring should be changed from industrial to residential grade.

And after all changes, the next door resi condo property will be half the cost of the newly converted office building to condo. Might as well demolish the office building to build a condo from scratch.
In my opinion, banks that are stuck with these loans will take a huge hit in 2024 and will need to do a significant mark-to-market adjustments to assets on their books.

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