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Comment by iancmceachern | Hacker News Reader

But those aren't the choices. The choices are A - get a commercial tenant that pays the high price you mention, if there aren't any tenants your choices are B - leave it vacant C - rent it out to a lower paying customer (residental).

Between B and C C is the clear winner.

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Not necessarily. B wins if you depend on the value of the property for some reason or another. Commercial properties are valued based on the net present value of the rents you can get. If you pretend that you can get a higher rate than the market will bear, you can keep the valuation of your building up during a downturn. If you accept the lower-paying tenant, you lower the perceived valuation of the building. This only matters if you have a commercial mortgage... which is every building these days.

This is utterly stupid, but it is driving rental vacancies in NYC.

I totally agree its dumb, like a lot of the water rights laws that actually require wasting of water.

I would say then the solution is to reform those laws, while we're at it we should reform the property tax laws in California.

Option C involves a large investment to convert the property into one that legally allows for residential usage and that people, with money to pay rent, would want to live in. It also blocks option A, without spending all the money to undo things, if the economic situation changes or there's a bailout. So not a clear winner versus simply waiting.

My point is that many buildings, like the one I live in now, do not need changes. They intelligently designed and built it from the beginning to serve both uses well. I'm pointing out that this is a smart approach. If a building needs a ton of renovations to make it meet code for residential occupancy than its not a good building to consider for this. I would say this is a corner case, ignore those. Just convert the 25% easiest buildings that need minimal if any changes.

That'd be true, if commercial property owners still had to pay their mortgages.

Commercial property owners are seeking forbearance agreements with their lenders. Forbearance is like hitting the "pause" button on a lending agreement, with the hope that market conditions bounce back and the original loan terms can continue.

What that means in practice is that a massive amount of real estate will rot, unused, in one of the most expensive cities in the world.

Seeking does not mean "will get." Banks lose money from forbearance agreements - especially when there is a reasonable out like converting to residential.

I've never understood why there isn't a D - lower prices until you get a commercial tenant who's willing to take you up at your asking price. As others have mentioned, converting from commercial to residential isn't cheap. Why do commercial prices stay sky high with a high vacancy rate?

The property owner almost certainly has debt that needs to be refinanced every few years. Willingness of a lender to finance is based on projected rental income. If the asking rents are high, the projected income is high. This apparently works for a while even if the property is not actually leased. It would seem to me that at some point the lenders would start saying "yeah the projected income looks great but we notice that the building has actually been vacant for two years..." but I don't operate in this world so it's something of a mystery to me.

However if the building value has dropped, the lender's collateral value has dropped and probably below their owed balance. No one wants to 'realize' the new lower value, including the lender, so they tend to extend the loan and hope for the best.

Because they can enter forbearance and just wait

It's not a clear winner. "Pray and delay" is a common strategy for commercial properties, because commercial mortgages allow you to defer payments.

You can't just rent out an office as an apartment. There are large costs associated with retrofitting the office space to be up to code for a residential unit. These retrofits would also likely lower the properties value as an office space. So C is not an obvious win in all cases - otherwise all landlords would be doing it.

Yes you can, if it was designed as such from the beginning. I literally live in one now. They go back and forth between residential and office occupancy with each lease, with no changes to the building or spaces themselves. It just has to be done right. My apartment is exactly identical to how it was when the previous tenant used it as an office.

So you do not have a kitchen and a bathroom with shower or the office used to have lots of kitchens and showers everywhere? It is not clear.

It's a large 2 story loft space. It has a full kitchen (as most offices do too these days), and 2 full bathrooms. There is a loft bedroom and small closed off office space that are both conference rooms when it's in office mode.

Really, how different are offices from apartments? You have space, kitchen, bathrooms, etc.

The only thing that is weird is most offices don't have a washer and dryer, other than that if I walked in this space and it was decorated as an office I wouldn't think twice, same in apartment mode.

Does it scale down? I can see two floors of an office building making a (very expensive) apartment but what about a cheap 1 bedroom? In "office mode", the office unit would be < 50% office, with most of the floor plan as bathrooms, laundry, and kitchen.

Not really.

I would argue that I live in a cheap 1 bedroom, it exactly this that you describe.

The bathrooms are a wash, both commercial and residential spaces require them. If anything the bathrooms in this arrangement are a bit smaller than traditional commercial bathrooms.

Same with the kitchen, commercial spaces have them, every place I've worked for the last 15 years has had one. So that's a wash. Also, our kitchen isn't huge, it's of similar size to those kitchens.

That leaves the laundry. For us it's a stacked unit in a small closet in the bathroom. They could easily be removed and then the closet could be used for bathroom cleaning supplies and no-one would ever suspect it wasn't just an office.

So the real comparison is: Residential: 1500 Sq ft loft, small glass office and loft bedroom, 2 full baths Commercial: 1500 Sq ft office, 1 large loft conference room, 1 small glass conference room/office, open Floorplan for 10-15 desks, 2 bathrooms with shower, full kitchen Both have door service, package receiving and security services provided on site, parking space

I'm sure there are buildings which are built to both codes. In the general case, there is significant costs in time and money to convert an office to a legal apartment unit.

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