Wave of Future Office Conversions in California, Elsewhere

It’s a phenomenon from New York to Dallas, Fresno and Los Angeles, one that seemed inevitable to some from the moment millions of Californians became the first Americans ordered to work from home as a way to combat the spread. of COVID-19.

The pandemic is not over yet despite the fact that the public is fed up with it. Viral variants of COVID still haunt the world as its third winter of human plague begins to wane. Yet millions of white-collar workers who have tried setting their own hours and creating their own work environments are still reluctant to return to the office more than once or twice a week. As a result, hundreds of millions of square feet of office buildings now sit vacant in California alone.

Empty offices made it clear from the first onslaught of the pandemic that apartment conversions would become an important part of the solution to California’s housing shortage, if not its dominant response. Now that’s becoming a reality, the only thing inexplicable is the fact that it’s taken three full years to transform from obvious concept to mainstream reality.

This is how real office building conversions have become: The website rentcafe.com reports that more than 4,130 apartments and condominiums will be created through office space conversions this year in Los Angeles alone. More than 1,000 new units are planned this year in Fresno, with 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 conversions: 372 converted units will open in Alameda this year, 250 in San Clemente, and 250 in the San Pedro section of Los Angeles, not counted in the total. announced from the city. In total, at least 10,000 new residential units will open in former office space before the end of this year.

Neither of these conversions will be highly controversial, as they don’t take up new space, don’t alter the views and skylines of existing neighborhoods, and therefore don’t trigger the environmental demands that hold up so many California construction projects, including a major addendum. to the state capitol.

Many more units are sure to follow, especially when this year’s already permitted crop begins to generate significant rentals and purchase prices. That’s a virtual certainty, as the new units range from street-level apartments with significant outside noise to ocean-view penthouses.

The number of units underway discredits detractors who claimed when the idea was first floated, just after Gov. Gavin Newsom issued the nation’s first stay-at-home orders in early 2020, that conversions would be more difficult to achieve. allow and build that new constructions. That hasn’t been true, especially since the state passed a law last fall that makes such permits virtually automatic when applied for.

Objections that office floor plans are completely different from residential ones have been quickly overcome, as necessary plumbing and electrical changes, as well as moving drywall barriers within existing interior spaces, proved less complex than some expected.

What’s more, the conversions are already turning into tax boons for local governments embattled with property taxes that were beginning to fall as office building vacancy rates remained high. As office rental income fell, so too could the assessed assessments that control the amounts of property tax dollars going to local schools, water and sewer districts and other local government agencies.

When converted units are sold, they become subject to the Proposition 13 1% tax on the most recent purchase price of any property. While commercial property tax rates typically remain relatively stable for decades, residential taxes can rise rapidly as units change hands.

At the same time, conversions are beginning to bail out real estate mutual funds, whose office rental income was declining, as were the dividends they pay investors. All of this is happening as office space finds a new and productive use.

The bottom line: Office conversions, first recommended by this column in April 2020, are now the wave of the future in California and elsewhere, a boon for everyone from first-time homebuyers to renters. , owners and premises. governments

Thomas Elias can be reached at [email protected] To read more of his columns, visit californiafocus.net online.

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