Going Remote by Matthew E. Kahn

Author:Matthew E. Kahn
Language: eng
Format: epub
ISBN: 9780520384316
Publisher: University of California Press

Commercial Buildings Conversion into New Housing

In many major US cities, there are iconic commercial office buildings such as 30 Rockefeller Center in New York City, the Transamerica Pyramid Building in San Francisco, the Prudential Center in Boston, and the John Hancock Tower in Chicago. What will become of these properties? Can they be converted into residential housing?

Commercial property owners may choose to incur costs to convert their property into residential real estate. If commercial real estate rents are high because a given building is located in a productive part of the city close to other commercial towers, then the conversion of those buildings into residential real estate can lower the value of other commercial rents because they lose access to productive partners. Individual owners of commercial properties, who tend to focus on their own profits, have little incentive to recognize whether their actions convey benefits or harms to nearby building owners.

If high-cost cities experience a sharp decline in commercial rents, some owners may be reluctant to sell at a much lower price. Real estate research based on data from Boston condos in the 1990s found that owners do not sell for a price below what they originally paid for the asset.47 In a bust, however, homes tend to sit on the market for long periods of time with asking prices well above expected selling prices, and many sellers eventually withdraw their properties without sale. Behavioral economists have advanced an explanation called “prospect theory,” which argues that asset owners keep in mind the asset’s purchase price and this price anchors their current decisions as they do not want to sell an asset for a loss. If the value of commercial buildings in superstar cities declines and if the asset owners engage in such behavioral logic, then they will be slow to sell their buildings to residential housing developers. Such individual behavior can have macroeconomic consequences for the city as the conversion of buildings from outdated commercial uses to demanded residential uses would be slowed due to price negotiations.

Regulations such as zoning laws can also slow down the transition. A misallocation of space will occur if there are vacant commercial properties adjacent to residential buildings with high rents and the commercial property cannot be rezoned for residential property. In Manhattan’s recent past, industrial space existed because Manhattan was a center of manufacturing in the 1950s. As these firms closed, this space was illegally used as residential space. If the land use code were more flexible, this transition of using buildings for their highest and best value would occur more quickly.

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