Workspace to Homeplace: The Rise of Office Conversions and How to Pull Them Off

 This episode explores a groundbreaking algorithm that could convert a third of office buildings into residential housing. Gensler Principal Steven Paynter discusses assessing convertibility based on location, age, and architecture. We delve into the economics of space optimization post-pandemic and challenges in different markets like Salt Lake City. Learn about the economic implications, cost efficiency, affordable housing incentives, and policy impacts reshaping our living and working spaces.

Transcript

Rachel Oh 0:04

Welcome to Peaks and Portfolios, presented by PEG Companies, your go-to podcast for all things commercial real estate investment. I'm Rachel oh, and together we're diving into current events, trends, issues and opportunities impacting the CRE investment space, from dissecting the latest market moves to sharing insights on today's commercial real estate landscape. It's time to maximize portfolios here in the peaks of the Mountain West and beyond. Welcome everybody, so glad you're here with us today for Peaks and Portfolios.

Rachel Oh 0:40

For today's episode we will be discussing a topic that is actually a huge area of current curiosity and discussion in commercial real estate development, and that is workplace to home place, the rise of office conversions and how to pull them off. We wanted to bring in today's guest, Steven Paynter from Gensler, to help shed light around how successful converting offices into residential really can be. What do we do with all the record and rather looming office space vacancies out there, and can conversions be palatable to developers and also solve our housing issues on so many fronts? I feel privileged to introduce you to today's guest Joining us from Toronto, gensler's very own Steven Paynter. Steven, welcome.

Steven Paynter 1:26

Hi, thanks very much and good to be speaking to you today.

Rachel Oh 1:29

Such a delight, such a delight. Thank you so much, Steven. Tell me a little bit about yourself. How long have you been with Gensler and how do you have that amazing British accent?

Steven Paynter 1:41

I originally kind of got licensed and qualified in the uk but came here during the last recession and came to toronto, basically because there was a huge amount of work and joined. Guns are about 10 years ago and I currently lead what we call our building transformation practice area worldwide, so that's anything that touches existing conditions, especially complex existing buildings or existing sites. So we have a big practice doing that. Obviously, it's top of mind for a lot of people right now.

Rachel Oh 2:13

Yeah, no, absolutely, and it sounds like your official title is the Global Leader of Building Transformation and Adaptive Reuse, which is kind of a mouthful actually, but you've also it sounds like you led the original research team that developed a conversion algorithm for this assessment. About, you know, I guess, assessing office building stock and the ESG assessment. Can you tell me a little bit about that?

Steven Paynter 2:40

Yeah, absolutely. So that actually came out of. You know something that we were looking at in 2019 when, if you remember that far back pre-COVID, people were talking about potential recession and we went out to developers and said, hey, what are you worried about? What have you got right now that's concerning to you, or what buildings do you own that are concerning? And a lot of them said the class C and B office wasn't really doing that well, we didn't know what to do with it. We started looking at conversions, but the feeling in the market then which I know some people still feel today is that conversions were tough to pull off, that they're expensive and that people have been looking at them. They're doing financial analysis on them. They couldn't make it work.

Steven Paynter 3:25

At the same time, even back then, we were doing projects. We were executing projects that were getting occupied. People were living in them and loving them. So we wanted to answer the question of why does it work sometimes and why is it a nightmare sometimes? And if you assume that all of the teams are of equal talent and the developers are equally skilled, it really had to come down to the buildings. Some buildings work and some buildings don't.

Steven Paynter 3:51

So the idea behind the algorithm back then was to say can we quickly identify ones that work versus ones that don't? Can we do that using data, rather than just really spending a lot of time designing and rendering and doing all that kind of fancy, time-consuming architecture stuff? Could we do it with data and could we give you an answer straight away? And that's really where the algorithm came from. It's this idea that you can take an office building, turn that into a data set, create a kind of fictional body locks residential building, turn that into a data set and then use an algorithm to bridge the gap between the two, to say this is your office building, this is the dream residential building. Where are the gaps? Where is that going to cost money? Where is the opportunity there to do something? And that's allowed us to really streamline the process, and we've used the algorithm now on over 1,250 buildings across almost every city and every state in the US and in Canada as well, and it's led us to a huge number of projects moving forward and a huge understanding of why some buildings are a great idea and why others. You could bang your head against the wall all day and you'd never actually make viable conversion out of them.

Rachel Oh 5:07

Yeah, I think in your article. So, again, I might have mentioned this earlier, but I kind of stalked you a little bit, Steven. So you wrote an article in October 2023. And at that time you had analyzed. It looks like over 300 buildings in 25 cities across North America. It looks like over 300 buildings in 25 cities across North America and at that time, the data revealed that only 25% of the buildings scored were actually suitable candidates for conversion. Is that still true or has that changed?

Steven Paynter 5:37

It's changed a little. The current numbers show 32% of buildings are viable. That's really down to just basic factors like floor plate. Can you lay them out for residential? Do people want to live there? If you did do a conversion, would people want to live in the building? But yeah, it's around 32% now. It varies a little bit per city. So generally older cities that don't have a formal city grid, like parts of Boston for example, they score lower 15% to 20% there. And then cities that have that typical CBD with a fixed city grid, especially cities that were developed in the late 60s, early 70s, they tend to score a little higher. That's just a function of the size of the buildings and whether or not they're point towers versus big, low buildings. But so it's evolved and we've updated our scoring approach as we've learned more and done more buildings. But the premise still holds true that it's 25% to 30% most of the time. Of the buildings we look at are a good starting point for a conversion.

Rachel Oh 6:45

Okay, so you mentioned floor plate, you mentioned location, a little bit of building form too, but it sounds like another piece of your analysis includes, I guess, the surrounding community and if it can sustain a residential housing. Is that what you were mentioning when you said being close to something built in like in the 20s and 30s is maybe a little further away from that, but the 60s and 70s, closer to kind of the city the beat. Is that what you were saying?

Building Conversions for Added Value

Steven Paynter 7:15

no, it's actually more in terms of form. So, okay, kind of classic 70s office building has a relatively small floor plate, um, it's normally set back a little from the sidewalk and it has windows on all sides. A lot of the older buildings and you see this in in new york and other cities as well, and the 30s 40s buildings were built right to the lot line on all sides and butt up against the next, um the next owner as well. So they struggle honestly a lot of the times because they just don't have windows on every side, and a lot of the buildings we studied in Boston only had windows on one side and it's okay for office. It's not great but obviously pretty terrible for residential.

Rachel Oh 8:00

I've heard again this is just me kind of gleaning back in my memory banks of things I've read I've heard that there are buildings and maybe it was in Manhattan where they would drill a hole in the middle to create window space in the middle. Did I read that right?

Steven Paynter 8:18

That's right. So we actually just finished a project in New York called Pearl House and that one we actually took out the middle of the building because it wasn't useful, so that space where you know, in a typical office building the washrooms would be, for example. I took that space out and that allowed us firstly an area to do mechanical risers, but it also reduced the density of the building and the weight of the building and that allowed us to build some really good penthouse space on the top for amenities and penthouse units. So you can do that, you can take out the middle of the building if it isn't useful space, or you can use that middle piece for amenities, which we've done on projects in Philadelphia, for example. Or, if you're really lucky, you'll find a building that just really doesn't have much that space and you can get a really efficient floor plate. And but all of those are kind of cost factors or value factors.

Rachel Oh 9:12

be that drive what our scoring shows it sounds really expensive to take out a chunk of the middle of the building. It sounds quite cost prohibitive in the way you explain it, you know, does it?

Steven Paynter 9:25

I mean it must pencil in the end what you can do with it okay yeah, it depends on two things you're where you are and then what you do with that space. So if you're in new york, for example, the value of the residential is really high probably one of the highest in the country and that means you can do a lot more, you can spend a lot more money and still get the returns to work, and you can spend that money to create a really high quality, high value product at the end.

Steven Paynter 9:52

But if you can take that space out and use the GFA to build more space on the roof, then you're actually taking away less valuable space and adding great space. Got it? And the Pearl House example if you go on the roof up there the views of the rivers you can see the Hudson and the East River. It's just absolutely incredible. So you can use that to bring real added value and added high-quality space if you get it right.

Rachel Oh 10:20

Is the Pearl House open now, then? Are there residents living in it?

Steven Paynter 10:24

You can currently rent there.

Rachel Oh 10:26

Okay, I might have to go on a tour you can go see all the different unit layouts.

Steven Paynter 10:30

Yeah, absolutely. We did a PBS documentary 30 Minutes, whatever they call it. We did that there at the end of last year and you can see it under construction as well. So I feel that's still available online if you want to search it out.

Rachel Oh 10:46

Oh, I definitely want to. I mean, you know, obviously I'm in this business and so you know real estate development is at our heart and core, and so I love it. But just as a citizen of the world, and you know, as we see city landscapes changing because office buildings are, you know, the pandemic just changed the way we view an office and you know how people, you know, spend their average workday. So I love seeing how we can do something, because it does seem like a travesty, you know, to have all these empty buildings and to have no viable use. So I love, love, love this topic. Even if I weren't in the business, I think I would find this super fascinating. Love this topic. Even if I weren't in the business, I think I would find this super fascinating.

Rachel Oh 11:33

Okay, so it sounds like, then, really truly, this 25 now to 30% viability of buildings being suitable for conversion, really do the way you. The algorithm is just purely on the form of the building. You're not necessarily considering the surrounding communities, you're just considering the integrity of the building itself and whether or not it's suitable, and so 25 to 30 percent does not seem like a lot. I mean, what do you do with the rest? Is there any hope? I mean, can you convert to hotels? For example, is it only for residential? Could you do something else? Could you convert to hotels? Or is there another usage for that? You know 60, 70 percent yeah, I mean the.

Steven Paynter 12:08

I think people often think 25, 30 isn't, isn't enough, but current vacancy is just over 20 percent, right, so you don't need to convert 100 of office buildings, you just need to reduce the vacancy down to what it was, uh previously. And calgary, where we did our first major study back in 2021, is a really good example. There's about 120 office buildings in the city and the city, through their incentive programs, currently approved the conversion of 17 of them. So say that's 15% or whatever, of the office market there, it's effectively halved or will halve the amount of vacancy that they had. So you don't need to convert every office building, because not every office building is vacant. If there's a 20% vacancy in a city, you probably need to take away half of that to get down to a sustainable level, so you need to convert 10%. It's finding the ones that should be converted and then finding the ones that should remain office and then finding the ones that have a different future use. That's really the key and that's what we've been doing a lot of.

Rachel Oh 13:18

Yeah, yeah, you know, since we're on this topic, I don't know if I told you, but we actually have done an office to residential conversion in Salt Lake City. Granted, we're on this topic. I don't know if I told you, but we actually have done an office to residential conversion in Salt Lake City. Granted, we're a tiny market, much smaller market than the markets that you just mentioned. It was a 48,000 roughly square foot, so tiny building. There were four floors but we only converted the three because the fourth floor were condos, so we couldn't necessarily touch them. I think we will and I spoke with the group. We converted them into 43 units and it's a great project. It looks great. There were certain stipulations. We couldn't touch the exterior. The city was pretty adamant about that and we learned a ton and they told me the biggest thing that the architect at the time had not considered was sound transference.

Adaptive Reuse Strategies in Real Estate

Rachel Oh 14:07

So we had a huge sound transference issue and so, as a result, we now have to go back in and fix that, but you know, for all intents and purposes it was quite successful. You've been looking at these big urban locations in historic cities. What have you done with, like, maybe the more suburban markets and any thoughts there about your same algorithm, or has this been applied to all sorts of market sizes?

Steven Paynter 14:36

Yeah, we've really applied it to all market sizes and types of city, and actually one thing that we've done with the algorithm is tailoring by city. So if I, for example, take a building in a major urban location San Francisco, new York, toronto or whatever we'll use a smaller average unit size because that's what the market is after. We'll use a different parking ratio, we'll use a different requirement for loading, for example, as well, and so if I'm looking at a building in new york, it's pretty common to have zero parking and to have no loading bay. So you just have to drag your furniture across the sidewalk into the building wow, um and to have a, you know, 500 square foot unit. I couldn't do that in salt city, for example. You know you'd have to have parking, you'd have to have yes, uh, proper loading.

Steven Paynter 15:23

You'd have to have parking you'd have to have proper loading, you'd have to have larger units, and so we've actually tailored the algorithm to know where the building is and what that market wants, which is absolutely critical to it. The suburban pieces it's kind of interesting because as well as doing these just normal straight conversions, we're also looking at what you do with more suburban markets, and a lot of the time that means maybe converting the office, but generally suburban office plates are bigger.

Steven Paynter 15:54

it often means densifying the site and there's a you know, a lot of that kind of work happening right now taking suburban malls or suburban office parks, removing surface parking, building more density on there and trying to turn those into more of a mixed use community. So it's similar to what we're doing in in cbd's trying to mix the use in there to get that vibrancy and the kind of a different approach it's, building new rather than just altering what was there, and I think that's key. We have have to, you know, to stop massive sprawl. We do have to take some of these suburban locations and do something more important with them.

Rachel Oh 16:32

Yeah, it's interesting you mentioned that We've done. We also have, you know, we do hotels as well, and so we have built hotels on former mall sites, because in the US the malls are massive or traditional malls and they have these huge parking lots and since everyone now just shops online, the parking lots are just completely empty. So we've gone in and we've built multifamily, We've built, you know, hotels. So it's interesting that you mentioned that, because I didn't even think of that in the same vein as. But it is. It's this reuse right Reuse of space, reuse of a building.

Steven Paynter 17:04

Yeah, is, but it is. It's this reuse right reuse of space, reuse of a building yeah, yeah very cool it's surprising, well, unsurprising maybe.

Steven Paynter 17:09

If you put you know, four or five thousand residential units around an existing mall, suddenly the mall starts doing a lot better and you'll see a lot. Toronto is doing that a lot where they're densifying the park around our, our bigger malls, and it's making the retail much, much more successful just by adding. You know, it seems obvious, but you're adding a whole bunch of residents. Therefore, you're adding a whole bunch of customers.

Rachel Oh 17:33

Yeah, yeah, no, super small, super, super smart. So you know we've been talking about office to residential and I just wanted to kind of touch on like office to something else. So we also have done one office to hotel conversion. In downtown Phoenix we took a historic building and we converted it to a hotel, so a Moxie by Marriott. But that one we did with the use of tax credits and that one we built during sort of this post-pandemic, you know, high cost environment and then interest rates went up and stuff. So our budgets just skyrocketed from that one and so it's hard to assess, like you know, how we would have approached it. You know pre-cost kind of accelerating the way they did. But just curious what other you know adaptive reuses that you've seen from offices. And I guess the other commentary I would love to hear from you is are tax credits important Because these aren't inexpensive conversions?

Steven Paynter 18:35

Yeah, yeah, there's a few things on the pack there, but the conversions to other uses absolutely the reason why we like and the market seems to like conversion to residential, because in most major cities there's a huge housing crisis and there's a vacancy crisis and you get to save the embodied carbon of the building. It kind of solves several problems at once. Originally, back during COVID, we were looking at conversion to uh, to senior living, conversion to hotel and all these kind of things. But also during covid those things were really struggling right, hotels were empty because no one could travel and senior living was dealing with major, you know, health crisis. That is now starting to pick up again and we are seeing more uh, hotel conversions. We're even seeing conversions from your office to kind of a health care or lab office or to make medical office, because that again is another major need across America.

Steven Paynter 19:35

So it's it's really that match between where there's a desperate need and where there's a desperate problem. Sure, seeing where you can make the links, hotels are super interesting, but they can be challenging because we already have, typically in an office conversion, an issue with the distance between the elevators and the glass and if that's too far, obviously the units end up very odd. Even more challenging are going to come back to hotel, whether the units are smaller or the rooms are smaller, right? So if you've got a you know, 300 square foot hotel room, then you've got to have a much shorter distance from the elevators to the windows to make it function.

Rachel Oh 20:18

Interesting.

Steven Paynter 20:19

Yeah, lots of opportunities. And when you do find one, when you do find an office building that's great for a hotel, you really found something special and a lot of those projects are happening. If you can find the right one, it's like a needle in a haystack kind of approach, but when you find it, it's incredible.

Rachel Oh 20:35

Is it just because of that distance you said, from the rooms to the elevator what makes it more of a needle in a haystack than a traditional residential conversion?

Steven Paynter 20:43

Yeah, it's typically that. I mean, if you imagine I'm going to do a one bed unit, 600 square feet as an example, a one bed unit, 600 square feet as an example, and if I come out of the elevators and it's 60 feet from the elevator door to the window, which is not unusual, then my 600 square foot unit at about 10 feet wide and 60 feet long, which you know is pretty unpleasant um, we call them like bowling alley units, but it's very difficult to lay now.

Steven Paynter 21:10

it's not wide enough to get a bedroom and a living space on the glass gotcha um, by contrast, if you find particularly you know, as I said, some of the 70s buildings, that distance was 40 feet or 35 feet, uh, quarter window, and then you can get a five foot corridor and a unit that's 30 by 20 feet and it's kind of really nice. You can get the bedroom and living space on the glass. You can go down to a hotel room. Well, hotel rooms are even smaller yeah then you need even less distance from the, from the corridor to the window, to make it work properly.

Office Building Conversions and Amenities

Rachel Oh 21:44

That's where it can start to get challenging I had no idea, like I never would have considered those things. This is why you do what you do and I do what I do, thank goodness. But I didn't even think that you would have to consider the distance between the room and the elevator and the glass and all that. So, okay, okay, that makes a lot of sense. Yeah, that again. This algorithm then accounts for all of these things. You must put input all of this in order to see the viability or the suitability of a conversion must put input.

Steven Paynter 22:12

All of this in order to see the viability or the suitability of a conversion. Yeah, absolutely so. You know reason. They're all sticking with the uh, the core to window debt example. Um, we look at that. We look at the average unit size in the market and then the algorithm grades your floor plate on a bell curve. Then of like, are you going to get the perfectly proportioned unit that's going to sell or rent for the most amount of money, or are you going to get the perfectly proportioned unit that's going to sell or rent for the most amount of money, or are you going to get a more and more constrained unit that will typically rent for less? So it's a very kind of finely tuned approach to that. And not just that everything from parking ratios to elevator ratios, to ceiling height and so on. If you look at the 1,200 buildings we've done, there's almost no building with the same score, because every building is just slightly different, slightly better or slightly worse in different metrics.

Rachel Oh 22:59

Yeah. So does it make sense to tackle a larger project, for example for it to do larger buildings score higher, and does it also just pencil better when you look at the underwriting and whatnot? I'm just curious does size matter in this instance?

Steven Paynter 23:16

It. Does you really want to be in the zone where you can create between about 100 and 300 units. So that's big enough that you get some critical mass and some economies of scale, but not so big that it's going to take you two years, three years, to get them all rented or sold. And that varies a little bit by market. You might be able to go up to 500 units in New York. You might want to go down closer to the 100 units in places like Salt Lake City for example. But there is that kind of sweet spot. The second you get over 400 or 500 units. Then all of a sudden you've got to find 400 or 500 residents and that can be challenging to do quickly and you're not making any money until you've got the units leased. So the less there are, the quicker that will happen. But the less there are you start to will happen. But the less there are you start to lose the economy of scale as well.

Rachel Oh 24:14

Yeah, you know, today's apartments are highly amenitized, right. They tend to have fitness centers, They've got swimming pools, they've got large lounge areas and whatnot, with these office buildings not necessarily having that, I guess the ground level there are some things. But just curious, are these buildings also highly amenitized? Are you able to do that and is that cost efficient? Does that?

Steven Paynter 24:37

yeah, typically they are highly amenitized, like most um residential, and what we're finding is you can really create top of market product through these conversions. A big reason for that honestly, it's a typical office floor to floor height is two three. Honestly, it's a typical office floor to floor height is two, three feet taller than a typical residential floor height. So you're already getting units with better ceilings, better glazing and and so on. But where what you do, the amenities can vary.

Steven Paynter 25:04

And actually we've been really successful with creating smaller on-floor amenity spaces in some of these projects. So taking out the space between the elevators you know where the washroom and mechanical spaces were and turning that into small on-floor amenities. So instead of the typical approach of one big floor where you've got, you know, 15,000 square feet of amenity in one place, we're breaking it up into two or 3,000 square foot pockets. What that allows you to do is create something a little different on every floor. So you might have, as an example, a kid's play area on one floor, you might have a little co-working space on a floor, you might have a little spin studio, and. But then you can create variation and it's a lot cheaper to switch those amenities out. And one thing becomes less popular or where you see oh actually we needed two spin studios, okay, great, we can switch out one of them to that a lot more easily than you could, uh, switch out an entire floor, and that really drives up your building efficiency too. So that's a a good approach. And and the rooftops?

Steven Paynter 26:05

uh, most rooftops of office buildings are just big, empty yeah kind of pancakes yeah um, so all of the conversions we've done. Now we've got rooftop amenities on there, so actually extending the elevator and adding stairs up to the roof yeah um to get that big kind of panoramic roof terrace yeah um, which has been. You know. It's amazing, even as office buildings, why we're not using these roof spaces more no, no I know just empty everyone loves a rooftop.

Rachel Oh 26:33

So you know, I know my guys are always kind of like not that they grumble but pools are expensive. Like can you put a pool on an old, older building office rooftop?

Steven Paynter 26:43

yeah, you can. You just have to be super careful. Um, so you know, we've just finished rivermark center in baton rouge that has a small pool on the roof. It's positioned over the elevators where it could take the weight and has stunning views over the Mississippi. It's a really nice project. In others we've put them in the basement, where it's structurally a lot easier to do it, so you can put like a small spa style pool and that could be really successful, as long as you make it feel like a spa and not like a basement.

Rachel Oh 27:16

Not like a creepy basement.

Cost Efficiency in Building Conversions

Steven Paynter 27:19

Yeah, exactly. So you just have to really have a good understanding of the existing building, what it can achieve structurally, and then you have some creative design solutions. It's all all. All these conversions are different, so everyone requires a slightly different solution yeah just have to be with mind to do something different on this project than you did on the last one yeah yep, yep, yep okay, so let's talk a little bit about costs here.

Rachel Oh 27:45

I think in that same article you mentioned that these conversions were at about 30 percent lower cost than new construction. Is that still hold true, even in today's cost environment?

Steven Paynter 27:58

So, yeah, sometimes we actually see the prices come in more expensive than ground up construction, and that's really one of two factors Either the building was not a good conversion candidate in the first place, in which case there's a lot of things about the building to be fixed or changed, which increases the cost pretty exponentially. The other thing is that we are still seeing contractors really don't understand the conversion process and therefore pressing in a lot of risk and a lot of contingency, of contingency. So we're trying to really help them through that, to help them understand the existing conditions, help them review the existing building drawings so they really know what's there and that can help bring down price as well. But, yeah, you're starting with the structure, you're starting with the facade, you're starting with some of the systems. You should be 30% less and if the project isn't coming in there and then you really need some help to understand where the issues are.

Steven Paynter 28:54

It's interesting to go one of these construction sites too, because you you can actually have you know, rather than the typical ground up approach of doing one floor at time, you can have people installing drywall on every single floor at the same time, so you'll have never seen more people on a construction site than you would if you go into one of these conversions when they're in full speed, and that really speeds things up too, and um, but yeah, it's, it's sticking around 30 percent cheaper.

Steven Paynter 29:22

And we're still seeing some buildings come in more expensive than ground up, but that's one of two reasons. Even they weren't a candidate for conversion in the first place, right? So there's a lot of things to fix and that's something that we've got very good at telling people before they start to just not start. And the other thing is that we're still seeing contractors price them with a lot of risk because there's not many contractors out there that have done this before, done this kind of work before, so they're pricing in a lot of contingency, a lot of risk, because they just don't know they don't know what they don't know, and that again is a thing we can.

Steven Paynter 30:00

Yeah, exactly. And again, that's something that we've really worked hard to develop an approach which helps reduce that risk. Typically now, before we even start, we'll the to the city and pull the original building permits. So I have a whole stack of drawings from the 50s and 60s, all on mylar and stuff, and we'll completely build a free digital model of those existing as built drawings, the original architect, original engineers, drawings, and so now when you open up a wall, there's no more saying oh, we didn't realize there was a column there. Because we do, because we know what was built in the first place, and that can help reduce risk, um, and help give people a bit more confidence that they know really what they're bidding on as well your algorithm seems quite crucial for the assessment of a project yeah, it's that first decision making phase phase.

Steven Paynter 30:51

Do you do this or not? Yeah, and you should only do it if you've got one of those 30% of buildings that work.

Rachel Oh 30:56

Yeah, no, that's perfect, that makes complete sense, you know. So I think I've mentioned our firm, granted. We're, you know, kind of focused here on the Mountain West, so our buildings aren't necessarily as old as some of the ones that you were mentioning. We've also done conversions where we will take extended stay hotels so vintage, like 80s, 90s, product first generation Marriott residences is what we really like and we'll convert them to multifamily this on the Class B side, and so we have a huge workforce housing initiative that we do and a lot of what you're describing it sounds like as much as there is a housing shortage in America, there is a workforce housing, slash affordable housing shortage. But it does seem like for these things to pencil, we probably developers would need to create class A product. Is that right for these? Office of residential? Or can you do office of residential and do workforce housing slash affordable housing like, does that pencil? Because I think that's the ongoing challenge in housing development is how do you make affordable housing accretive to the investor?

Steven Paynter 32:04

it is a real uh challenge and you know we never quite covered the, the incentives uh before, but that is key and you're seeing incentive programs from HUD, from the US federal government.

Steven Paynter 32:19

You're seeing the federal government back low-interest loans to try and get more affordable housing as well, and I think that is critical to call. Another interesting approach, actually from one of our clients who I won't name but their approach to affordable housing is to create really high quality products and manage it well, and that sounds kind of ridiculous, but they've reduced the turnover from about 8% a year to about 2% and that just means they're getting more rent, because every time someone leaves an apartment they have to repaint it, they have to wait a month, and then someone else moves in. So for every month they um, every time that happens, they're losing a month of rent, sure? So they've done a high quality product produced over to increase their profitability from the affordable housing, and it's such a nice way to do it. You know what? What a wonderful way to do a project to just make the affordable housing nicer, so that people stay longer, so that you get more. So that kind of approach we're seeing in these conversions as well.

Rachel Oh 33:23

So and you?

Steven Paynter 33:23

can really do anything if you.

Rachel Oh 33:25

So just to go back, when you say affordable housing, we're talking true. Affordable housing is you're saying, make those nicer and better managed and therefore it does become more financially interesting to the investors. Then Did I capture that correctly.

Steven Paynter 33:42

Yeah, I know it sounds unusual, but if you can reduce turnover and can be a significantly more interesting project, it comes down to how you kind of design and manage them.

Rachel Oh 33:55

Okay.

Steven Paynter 33:55

But you're right, it's a mix of affordable and workforce, and every city and every government seems to have a slightly different definition of what that means.

Steven Paynter 34:04

Yes, In Toronto, affordable can just mean really small because it's based on monthly rent Interesting. So there's a real mix. You know, family affordable, yeah, truly affordable, yeah. But you can make anything. We're seeing that, yeah, in the conversions that happen in calgary, for example. There's a lot of affordable housing going in there, partially backed by the canadian mortgage housing association, um, but you're seeing anything from that right the way through to super super luxury like the. The amount of residences in new york is an office conversion project and they are 50 million dollars and up for a unit.

Steven Paynter 34:44

So wow, not affordable affordable, or you can be 50 million dollars, yeah, and you can kind of be anything in between. So it just depends where you are and what you want to try and achieve 50 million. These are the amman residences you say in new york, dang yeah not one of our projects, unfortunately, but well worth uh looking on the internet yeah, wow, um, yeah.

Rachel Oh 35:06

No, we have an amangiri here in page and I've been there and that's just a hotel. I can only imagine what their residences must be like. So that's interesting, okay. So yeah, let's get back to. So, you know, our investors everything, at the end of the day, has to pencil.

Rachel Oh 35:20

We want to do more affordable, you know, housing type things, because of course we want to, you know, contribute to our communities, but it doesn't always make sense. So, you know, we mentioned tax credits and government backed loans and et cetera. I noticed that in October 2023, and I know that you're in Calgary, but I imagine you're abreast of all these things the Biden administration had actually directed the US Department of Transportation to make $35 billion in funding available, and these were projects that were close to transit nodes, or specifically rail, apparently, and then that would open up all sorts of loans, and I think there was this huge commotion that, oh, this is going to assist with office to residential but turns out not so. Do you know enough about that? Again, I can read what the articles share, but I'm just curious if it was a big enough impact that you even know about it, as you've been talking to all these different developers about office to residential conversions.

Steven Paynter 36:17

Yeah, so I was actually part of the team that went to the White House in the summer of last year to help put that together with the real estate roundtable. Um, that the office conversion guidebook, as it was called, from the white house really sets out the groundwork for what different federal agencies have to do the department of energy, department of transportation and and HUD as well. Yeah, um, it's one thing it didn't do was really change what the departments do. You know, department of transportation does not normally build housing, nor does the department of energy. So the guide a really good start. It sets out the money, it sets out the um, the kind of policy initiative. Yeah, what we're finding now, uh, three or four months into it, is that there are some things in there because of the, the policies were written to build rail stations, for example. Yes, um, that make uh, the up stumbling blocks for residential. So there's, you know, just weird quirks around environmental reviews and ridership numbers and distance from a fixed rail and so on.

Rachel Oh 37:23

You have to be a half mile it says from a half mile and I guess that eliminates a bunch of cities that don't even have any rail.

Steven Paynter 37:32

Yeah, and there's a range of programs, right, so the half mile is the program. There's others through TIFIA, through the Department of Energy as well. None of them are quite there yet. So we're now going back through the stumbling blocks and weird kind of anomalies we've found, going back to the different departments, federal departments, and trying to work out how to get past them. And I think the the next round, now that everyone's aware of it, the next round will actually be to update some of those policies and get the money flowing again okay because it will make a huge difference.

Steven Paynter 38:07

Yeah, it'll be loaned at just above treasury rate, which, at the moment, is four ish percent. Yes, versus a construction loan right now, which is 10 or 12 percent. Um, that makes millions of dollars difference per project, and so that is something that was specifically requested during the first round of talks and something that should hopefully start being delivered this year with the obvious kind of time cap of wanting to deliver something before November Of course, a selection year.

Rachel Oh 38:42

It's always good to be in an election year when you're making some changes like that. So now you're right.

Steven Paynter 38:48

Puts the time crunch on getting good policy out.

Rachel Oh 38:50

Yeah, no, I mean yeah because I was reading about it. It was just talking about how approval for these funds take 18 to 24 months and we know that traditional closing on funds take 18 to 24 months and we know that traditional, you know, closing on loans take 60 to 90 days. I mean, there's just, you know, there's time stipulations. There were all these environmental reviews, and so that's great. I and I had no idea that you were part of that White House board or group around people that you mentioned that, that made some commentary on that. So that's great to hear Because I do think it could make an impact and we could see landscapes continue to change across America if they could get that money free-flowing. $35 billion is a lot of money. Yeah, it could do a lot.

Steven Paynter 39:29

It is, and there's more than that. I mean there's just over $200 billion between all of the different programs, the different programs okay, right, because what I'm?

Rachel Oh 39:40

talking about is department of transportation alone. You're talking about department of energy and some of the other okay dang.

Steven Paynter 39:46

yeah, it could really change the industry. And what's been kind of amusing to me over the last six months is that we're not speaking to developers, who never wanted to touch federal money before, never wanted to touch federal incentives or tax abatement, and all of a sudden they're super interested because that's the only place to get reasonable debt at the moment and they need those incentives to make the projects work.

Rachel Oh 40:10

Yeah, well, and we need the projects to work because, to your point, there's a housing crisis. We've got just these buildings that we could do something different with, and I think it could just add life again, bring more life back to the cities. Yeah.

Rachel Oh 40:25

But anyway, kind of piggybacking off of that, it does seem like at the end of February this year Gensler was again in the news as HUD awarded you folks with funding to analyze conversion activities in the six cities. So I imagine you're a big part of that. Can you tell us a little bit more about what that looks like and what that entails?

Steven Paynter 40:45

Yes, so we're super excited. That's a large research project. It's really aimed around helping cities figure out what they need to do, what policy changes that they need to make to make these conversions happen and create housing. What do they need to do in terms of incentives? Do they need to do things in terms of incentives, and how can they do that in an equitable way? That's not going to just massively gentrify or change neighborhoods and displace existing communities. So it's very, very early stage. You know, announced last week, we are just starting to put the teams together. But, yeah, it's exciting because I think it will really start the guide policy and it'll also allow cities that aren't of the scale to be able to do this research themselves. It will give them a playbook, it will give them the ability to see how it could impact their city, um, and to be able to streamline that in a way that they really wouldn't be able to without this kind of federal level, uh approach to it have you identified the six cities?

Steven Paynter 41:50

you're not the first person to ask that question this week.

Steven Paynter 41:55

Um, no, we haven't identified the cities.

Steven Paynter 41:58

We we need to start with the research. Um, so we're gonna, we're gonna narrow it down from, I think, three and a half thousand cities in the us to, um, about 20 that are worthy of a bit more study and then get into the six, uh, final cities. But the the key really is that they're not going to pick the six you know best cities in inverted commas in the US. We want to pick cities that are, for want of a better term, stereotypical. So we've got to pick a city which is analogous to 20 other cities or 50 other cities in the US, so that anyone in any part of the country can look at that study for that city and say, oh, that's kind of like my hometown and therefore I can use that as an example of what to do here. So we don't want to pick six standard cities that are one-offs in the country. We want to pick six that could really represent the entire population. So finding the six is going to be, you know that's a challenge unto itself, but we're excited to get stuck into it.

Rachel Oh 43:02

Yeah, well, I'm hoping that Salt Lake City is on your list only because I think we're representative of a smaller markets, right? I think smaller markets need this kind of data as well, and so if you're able to help some of these you know these middle markets are growing, right Help us to better understand how to do it. I'm just putting a little plug. You know, I'm not even from here. I was born and raised in Seattle, but Salt Lake has become kind of my home.

Steven Paynter 43:28

So anyway, I just think you know, or maybe like a Denver, I don't know, maybe Denver is more representative, but some of our smaller communities, would be great, and Denver's actually already completed an office to residential study and they have a small incentive program in place that we help them through. So there are some cities doing this on their own already. We've done about 15 cities in the US now to help them put incentive programs together. But yeah, salt Lake would be a great example. I was there just at the end of last year. Oh yeah.

Steven Paynter 43:59

Up in Park City and in Salt Lake as well, so I'd love an excuse to come back. Well, we'll see what happens.

Rachel Oh 44:06

Anytime you want to come back, Steven, you have an open invitation from Peg. We would be happy to host you, so you just let us know. Skiing or hiking, whatever you want to do I got you. Or hiking, whatever you want to do I gotcha. Okay. Well, I appreciate all this, Steven. This has been super, super helpful and has really, you know, given us a better peek and insight into office to residential, you know as kind of parting words. Is there anything that you would want to just maybe underscore that would help you know investors when they're looking at because I think a lot of these groups now are coming out what would you say is something that you would just make sure investors are paying attention to when they're evaluating potential investment deals in these specific office to residential conversions.

Steven Paynter 44:51

Yeah, it's really start with the right building. That is absolutely everything. Our research shows that only 30 percent of buildings work. That's 70 percent of the time. You're starting with the wrong building, so you can spend a lot of time and money chasing that and and ending up, you know, torturing yourself over it not working. Um, so start with the right one and they can be great and we've got lots of built examples of great conversion projects that are really successful but if you start down the wrong path, you will never be able to force it back into profitability.

Rachel Oh 45:27

Okay, and your algorithm is probably one of the ways in which you can identify the right building correct. I mean not trying to like plug your business, but I mean it sounds like your algorithm is one of the ways right In which you can identify the right building.

Steven Paynter 45:42

Yeah, absolutely, and that's why we did it, because you have to be able to do that quickly. You know it's a fail fast mentality. Let's find out whether it's the right building or not in a matter of days and then invest lots of time and effort into making the project work. Let's not spend six months doing the wrong building and then, everyone's upset with each other at the end.

Rachel Oh 46:02

No, let's not do that. Let's not do that. Okay, great Well, Steven, thank you so much, really, really appreciate your time, appreciate all your expertise. Thank you so much for helping our government, too, figuring this out right, and I'm looking forward to the results of your study.

Steven Paynter 46:22

So if we reach back out to you, maybe in a year for a follow-up, would you join us again? Yeah, absolutely, and we could be at a ship, some kind of interim things on the way as we learn more, as we identify the cities, and then we'll be hosting a big event about this time next year to present all the studies to any city or developer that's interested in learning more.

Rachel Oh 46:39

Oh good. Well then, definitely, I think we'd love to come, and then maybe we'll do a follow on from that. That'll be a good one. Okay, well, Steven, thank you so much. Thank you for joining us for Peaks and Portfolios by PEG Companies. We appreciate your time and we look forward to seeing you soon.

Steven Paynter 46:52

Perfect Thanks for inviting me.

Rachel Oh 46:54

Thanks, Steven, and thanks to all of you, our listeners, for joining us for this week's episode of Peaks and Portfolios. This has been an incredibly informative conversation. I learned a lot and hope you all did too. Catch us all next week as we summit another peak. Talk to you all soon.