CHM Blog

‘Working from home’ might someday mean working from your old high-rise office building

It’s no secret. In fact, it’s a problem. Not enough housing and too much office space.

According to CNBC’s Carols Waters, mayors in cities across the U.S. want to loosen rules that can slow the pace of office-to-residential conversions — some of it in the form of generous tax abatements to developers who build new housing.

“We have a great opportunity to change the uses in the downtown,” said Washington, DC, Mayor Muriel Bowser at a December 2022 news conference in support of her housing budget proposals. But not all those at the top think it’s more than a budget gimmick — something that need not be subsidized by a given city.

Cities like Philadelphia have previously embraced these policies to revitalize their downtowns, according to Waters. “In Philadelphia, homeowners and investors received more than $1 billion in tax breaks for their renovation projects,” he says, adding that a small collective of developers have taken on this challenging slice of the real estate business.

And then there is the West coast, where Jason Ward, a RAND Corporation economist who has studied the feasibility of commercial-to-residential conversions also pointed to an added advantage, particularly in a market like San Francisco: less community opposition.

“It’s a lesser issue than we’re going to knock down these single-family homes and build a 60-unit building,” Ward said. “It’s already there, it usually has parking and looks more or less the same as before.”

An article in the San Francisco Standard points out how developers of The Pacific in Pacific Heights were able to build a 76-unit condo building in a neighborhood with a history of anti-development activism by adapting a former medical office building.

Gutting a building and rebuilding the inside as housing is expensive, however, especially in San Francisco and especially while construction costs are high. Evidently, asking rents for downtown commercial leases have dropped around 15% from pre-pandemic peaks. The only reason that they haven’t dipped further is because of the relatively long lease terms signed by commercial tenants and market optimism that the return to office will continue at a gradual pace. As it stands, the city and the market aren't convinced that empty offices downtown are here to stay, saying that just because it worked for a year or two is no guarantee that it will last.

Waters says many experts believe local governments will alter zoning laws and building codes to make these conversions easier over the years. Empty office buildings are just the tip of the iceberg for these changes.

CNBC, SanFranciscoStandard, TBWS

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I'm among few mortgage professionals who have access to live trading screens during market hours.

Rates Currently Trending: Neutral

Mortgage rates are moving sideways today. The MBS market worsened by -3 bps last week. This was not enough to increase mortgage rates or fees. The market experienced moderate volatility last week.

This Week's Rate Forecast: Neutral

Three Things: These are the three areas that have the greatest ability to impact rates this week. 1) The Fed, 2) Central Banks and 3) Inflation.

1) The Fed: We will get the Fed's latest Interest Rate Decision and Policy Statement on Wednesday. The markets are widely expecting a 25BPS increase but the tone of the Policy Statement, vote count and live Presser with Powell could have a huge impact on pricing.

2) Central Banks: We get a key Interest Rate Decision out of the ECB on Thursday which is expected to raise by 25BPS and has been quite "hawkish" their last couple of meetings. A change in guidance or tone will move markets. The Bank of Japan has their meeting results on Friday morning. They are not expected to change their rate but the markets are interested in any change to their YCC (yield curve control) policy.

3) Inflation: We get the Fed's key measure of inflation, Core PCE on Friday.

This Week's Potential Volatility: High

This morning markets are mostly treading water. Volatility has started low this week but FOMC and PCE could cause big waves.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.

Richard Sardella has been actively managing and providing services in the mortgage industry for over 30 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.

All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

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