Office Conversion Reality Check

There’s a wave of office-to-residential conversions building in major U.S. markets, right? Not really. In fact, the statistics suggest that most office buildings — however emptier due to hybrid work schedules —will remain primarily office, for better or worse. The financials and timelines of redevelopment just don’t make sense in most cases. Also, half a dozen major banks are participating in a pilot program to test the country’s financial resilience to climate change, and commercial real estate’s vulnerability is playing a big role.

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— Tom Acitelli, Co-Deputy Editor

Office-to-Residential Conversions: What's Not Being Discussed

As any rabbi, imam or priest will tell you, conversion is not simple. Office owners know that too. Or they should. The frenzy for office-to-residential conversions has turned adaptive reuse — as a potential messiah for both solving the housing crisis and tackling hybrid work’s effects on central business districts and municipal tax rolls — into a quasi-religious quest coast to coast. Article after article and analysis after analysis will suggest that the changeover is both inevitable and desirable. Yet, while the widespread shift has been debated and gamed out, no one area or firm has acted on it on a large scale. Of the 78 office buildings sold in Manhattan since the dawn of the pandemic until November, for instance, only three were slated for residential conversions, according to Avison Young research. For many analysts and developers attracted to the challenge of redevelopment, even the rosiest urbanist visions and idealism can’t reshape the physics of bloated office buildings and the hard math of conversions.

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Fed Asks U.S. Banks to Stress-Test Their Exposure to Climate Risk

The Federal Reserve is running a pilot program to test the country’s financial exposure to climate change, and commercial real estate vulnerability is front and center. Six of the largest U.S. banks will participate in a “climate scenario analysis” exercise that will look at their exposure to two types of climate danger: physical risk from climate events and chronic warming, and transition risk from the transition away from fossil fuels, according to new details released Tuesday by the Fed. The six participating banks — JPMorgan Chase, Citigroup, Goldman Sachs, Bank of America, Morgan Stanley and Wells Fargo — comprise roughly half of the country’s banking industry and control hundreds of billions of dollars in investments. The program includes two assessments, one each for physical and transitional risks. Both will focus on the banks’ commercial real estate loan portfolios.

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