April 25, 2024 • 47 mins
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.
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Episode Transcript
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Rachel Oh (00:04):
Welcome to Peaks and Portfolios, presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:25):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Welcome everybody, so gladyou're here with us today for
Peaks and Portfolios.
For today's episode we will bediscussing a topic that is
actually a huge area of currentcuriosity and discussion in
(00:47):
commercial real estatedevelopment, and that is
workplace to home place, therise of office conversions and
how to pull them off.
We wanted to bring in today'sguest, Steven Paynter from
Gensler, to help shed lightaround how successful converting
offices into residential reallycan be.
What do we do with all therecord and rather looming office
(01:08):
space vacancies out there, andcan conversions be palatable to
developers and also solve ourhousing issues on so many fronts
?
I feel privileged to introduceyou to today's guest Joining us
from Toronto, gensler's very ownSteven Paynter.
Steven, welcome.
Steven Paynter (01:26):
Hi, thanks very much and good to be speaking to
you today.
Rachel Oh (01:29):
Such a delight, such a delight.
Thank you so much, Steven.
Tell me a little bit aboutyourself.
How long have you been withGensler and how do you have that
amazing British accent?
Steven Paynter (01:41):
I originally kind of got licensed and
qualified in the uk but camehere during the last recession
and came to toronto, basicallybecause there was a huge amount
of work and joined.
Guns are about 10 years ago andI currently lead what we call
our building transformationpractice area worldwide, so
that's anything that touchesexisting conditions, especially
(02:05):
complex existing buildings orexisting sites.
So we have a big practice doingthat.
Obviously, it's top of mind fora lot of people right now.
Rachel Oh (02:13):
Yeah, no, absolutely, and it sounds like your
official title is the GlobalLeader of Building
Transformation and AdaptiveReuse, which is kind of a
mouthful actually, but you'vealso it sounds like you led the
original research team thatdeveloped a conversion algorithm
for this assessment.
(02:34):
About, you know, I guess,assessing office building stock
and the ESG assessment.
Can you tell me a little bitabout that?
Steven Paynter (02:40):
Yeah, absolutely .
So that actually came out of.
You know something that we werelooking at in 2019 when, if you
remember that far backpre-COVID, people were talking
about potential recession and wewent out to developers and said
, hey, what are you worriedabout?
What have you got right nowthat's concerning to you, or
what buildings do you own thatare concerning?
And a lot of them said theclass C and B office wasn't
(03:04):
really doing that well, wedidn't know what to do with it.
We started looking atconversions, but the feeling in
the market then which I knowsome people still feel today is
that conversions were tough topull off, that they're expensive
and that people have beenlooking at them.
They're doing financialanalysis on them.
They couldn't make it work.
(03:25):
At the same time, even back then, we were doing projects.
We were executing projects thatwere getting occupied.
People were living in them andloving them.
So we wanted to answer thequestion of why does it work
sometimes and why is it anightmare sometimes?
And if you assume that all ofthe teams are of equal talent
and the developers are equallyskilled, it really had to come
(03:47):
down to the buildings.
Some buildings work and somebuildings don't.
So the idea behind the algorithmback then was to say can we
quickly identify ones that workversus ones that don't?
Can we do that using data,rather than just really spending
a lot of time designing andrendering and doing all that
kind of fancy, time-consumingarchitecture stuff?
(04:08):
Could we do it with data andcould we give you an answer
straight away?
And that's really where thealgorithm came from.
It's this idea that you cantake an office building, turn
that into a data set, create akind of fictional body locks
residential building, turn thatinto a data set and then use an
algorithm to bridge the gapbetween the two, to say this is
(04:30):
your office building, this isthe dream residential building.
Where are the gaps?
Where is that going to costmoney?
Where is the opportunity thereto do something?
And that's allowed us to reallystreamline the process, and
we've used the algorithm now onover 1,250 buildings across
almost every city and everystate in the US and in Canada as
(04:50):
well, and it's led us to a hugenumber of projects moving
forward and a huge understandingof why some buildings are a
great idea and why others.
You could bang your headagainst the wall all day and
you'd never actually make viableconversion out of them.
Rachel Oh (05:07):
Yeah, I think in your article.
So, again, I might havementioned this earlier, but I
kind of stalked you a little bit, Steven.
So you wrote an article inOctober 2023.
And at that time you hadanalyzed.
It looks like over 300buildings in 25 cities across
North America.
It looks like over 300buildings in 25 cities across
North America and at that time,the data revealed that only 25%
(05:28):
of the buildings scored wereactually suitable candidates for
conversion.
Is that still true or has thatchanged?
Steven Paynter (05:37):
It's changed a little.
The current numbers show 32% ofbuildings are viable.
That's really down to justbasic factors like floor plate.
Can you lay them out forresidential?
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.
(05:59):
So generally older cities thatdon't have a formal city grid,
like parts of Boston for example, they score lower 15% to 20%
there.
And then cities that have thattypical CBD with a fixed city
grid, especially cities thatwere developed in the late 60s,
(06:20):
early 70s, they tend to score alittle higher.
That's just a function of thesize of the buildings and
whether or not they're pointtowers versus big, low buildings
.
But so it's evolved and we'veupdated our scoring approach as
we've learned more and done morebuildings.
But the premise still holdstrue that it's 25% to 30% most
(06:40):
of the time.
Of the buildings we look at area good starting point for a
conversion.
Rachel Oh (06:45):
Okay, so you mentioned floor plate, you
mentioned location, a little bitof building form too, but it
sounds like another piece ofyour analysis includes, I guess,
the surrounding community andif it can sustain a residential
housing.
Is that what you werementioning when you said being
(07:07):
close to something built in likein 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?
Steven Paynter (07:15):
no, it's actually more in terms of form.
So, okay, kind of classic 70soffice building has a relatively
small floor plate, um, it'snormally set back a little from
the sidewalk and it has windowson all sides.
A lot of the older buildingsand you see this in in new york
and other cities as well, andthe 30s 40s buildings were built
(07:37):
right to the lot line on allsides and butt up against the
next, um the next owner as well.
So they struggle honestly a lotof the times because they just
don't have windows on every side, and a lot of the buildings we
studied in Boston only hadwindows on one side and it's
okay for office.
It's not great but obviouslypretty terrible for residential.
Rachel Oh (08:00):
I've heard again this is just me kind of gleaning
back in my memory banks ofthings I've read I've heard that
there are buildings and maybeit was in Manhattan where they
would drill a hole in the middleto create window space in the
middle.
Did I read that right?
Steven Paynter (08:18):
That's right.
So we actually just finished aproject in New York called Pearl
House and that one we actuallytook out the middle of the
building because it wasn'tuseful, so that space where you
know, in a typical officebuilding the washrooms would be,
for example.
I took that space out and thatallowed us firstly an area to do
(08:38):
mechanical risers, but it alsoreduced the density of the
building and the weight of thebuilding and that allowed us to
build some really good penthousespace on the top for amenities
and penthouse units.
So you can do that, you cantake out the middle of the
building if it isn't usefulspace, or you can use that
middle piece for amenities,which we've done on projects in
(08:59):
Philadelphia, for example.
Or, if you're really lucky,you'll find a building that just
really doesn't have much thatspace and you can get a really
efficient floor plate.
And but all of those are kindof cost factors or value factors
.
Rachel Oh (09:12):
be that drive what our scoring shows it sounds
really expensive to take out achunk of the middle of the
building.
It sounds quite costprohibitive in the way you
explain it, you know, does it?
Steven Paynter (09:25):
I mean it must pencil in the end what you can
do with it okay yeah, it dependson two things you're where you
are and then what you do withthat space.
So if you're in new york, forexample, the value of the
residential is really highprobably one of the highest in
the country and that means youcan do a lot more, you can spend
a lot more money and still getthe returns to work, and you can
(09:48):
spend that money to create areally high quality, high value
product at the end.
But if you can take that spaceout and use the GFA to build
more space on the roof, thenyou're actually taking away less
valuable space and adding greatspace.
Got it?
And the Pearl House example ifyou go on the roof up there the
views of the rivers you can seethe Hudson and the East River.
(10:11):
It's just absolutely incredible.
So you can use that to bringreal added value and added
high-quality space if you get itright.
Rachel Oh (10:20):
Is the Pearl House open now, then?
Are there residents living init?
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 30Minutes, whatever they call it.
We did that there at the end oflast year and you can see it
under construction as well.
So I feel that's stillavailable online if you want to
search it out.
Rachel Oh (10:46):
Oh, I definitely want to.
I mean, you know, obviously I'min this business and so you
know real estate development isat our heart and core, and so I
love it.
But just as a citizen of theworld, and you know, as we see
city landscapes changing becauseoffice buildings are, you know,
the pandemic just changed theway we view an office and you
(11:08):
know how people, you know, spendtheir average workday.
So I love seeing how we can dosomething, because it does seem
like a travesty, you know, tohave all these empty buildings
and to have no viable use.
So I love, love, love thistopic.
Even if I weren't in thebusiness, I think I would find
this super fascinating.
Love this topic.
Even if I weren't in thebusiness, I think I would find
this super fascinating.
(11:33):
Okay, so it sounds like, then,really truly, this 25 now to 30%
viability of buildings beingsuitable for conversion, really
do the way you.
The algorithm is just purely onthe form of the building.
You're not necessarilyconsidering the surrounding
communities, you're justconsidering the integrity of the
building itself and whether ornot it's suitable, and so 25 to
30 percent does not seem like alot.
I mean, what do you do with therest?
Is there any hope?
(11:53):
I mean, can you convert tohotels?
For example, is it only forresidential?
Could you do something else?
Could you convert to hotels?
Or is there another usage forthat?
You know 60, 70 percent yeah, Imean the.
Steven Paynter (12:08):
I think people often think 25, 30 isn't, isn't
enough, but current vacancy isjust over 20 percent, right, so
you don't need to convert 100 ofoffice buildings, you just need
to reduce the vacancy down towhat it was, uh previously.
And calgary, where we did ourfirst major study back in 2021,
(12:28):
is a really good example.
There's about 120 officebuildings in the city and the
city, through their incentiveprograms, 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 willhalve the amount of vacancy that
(12:49):
they had.
So you don't need to convertevery office building, because
not every office building isvacant.
If there's a 20% vacancy in acity, you probably need to take
away half of that to get down toa sustainable level, so you
need to convert 10%.
It's finding the ones thatshould be converted and then
finding the ones that shouldremain office and then finding
(13:11):
the ones that have a differentfuture use.
That's really the key andthat'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 weactually have done an office to
residential conversion in SaltLake City.
Granted, we're on this topic.
I don't know if I told you, butwe actually have done an office
to residential conversion inSalt Lake City.
Granted, we're a tiny market,much smaller market than the
markets that you just mentioned.
It was a 48,000 roughly squarefoot, so tiny building.
There were four floors but weonly converted the three because
(13:39):
the fourth floor were condos,so we couldn't necessarily touch
them.
I think we will and I spokewith the group.
We converted them into 43 unitsand it's a great project.
It looks great.
There were certain stipulations.
We couldn't touch the exterior.
The city was pretty adamantabout that and we learned a ton
(14:01):
and they told me the biggestthing that the architect at the
time had not considered wassound transference.
So we had a huge soundtransference issue and so, as a
result, we now have to go backin and fix that, but you know,
for all intents and purposes itwas quite successful.
You've been looking at thesebig urban locations in historic
cities.
What have you done with, like,maybe the more suburban markets
(14:29):
and any thoughts there aboutyour same algorithm, or has this
been applied to all sorts ofmarket sizes?
Steven Paynter (14:36):
Yeah, we've really applied it to all market
sizes and types of city, andactually one thing that we've
done with the algorithm istailoring by city.
So if I, for example, take abuilding in a major urban
location San Francisco, new York, toronto or whatever we'll use
a smaller average unit sizebecause that's what the market
(14:58):
is after.
We'll use a different parkingratio, we'll use a different
requirement for loading, forexample, as well, and so if I'm
looking at a building in newyork, it's pretty common to have
zero parking and to have noloading bay.
So you just have to drag yourfurniture across the sidewalk
into the building wow, um and tohave a, you know, 500 square
foot unit.
I couldn't do that in salt city, for example.
(15:20):
You know you'd have to haveparking, you'd have to have yes,
uh, proper loading.
You'd have to have parking you'dhave to have proper loading,
you'd have to have larger units,and so we've actually tailored
the algorithm to know where thebuilding is and what that market
wants, which is absolutelycritical to it.
The suburban pieces it's kindof interesting because as well
as doing these just normalstraight conversions, we're also
(15:43):
looking at what you do withmore suburban markets, and a lot
of the time that means maybeconverting the office, but
generally suburban office platesare bigger.
it often means densifying thesite and there's a you know, a
lot of that kind of workhappening right now taking
suburban malls or suburbanoffice parks, removing surface
(16:05):
parking, building more densityon there and trying to turn
those into more of a mixed usecommunity.
So it's similar to what we'redoing in in cbd's trying to mix
the use in there to get thatvibrancy and the kind of a
different approach it's,building new rather than just
altering what was there, and Ithink that's key.
We have have to, you know, tostop massive sprawl.
(16:26):
We do have to take some ofthese suburban locations and do
something more important withthem.
Rachel Oh (16:32):
Yeah, it's interesting you mentioned that
We've done.
We also have, you know, we dohotels as well, and so we have
built hotels on former mallsites, because in the US the
malls are massive or traditionalmalls and they have these huge
parking lots and since everyonenow just shops online, the
parking lots are just completelyempty.
So we've gone in and we'vebuilt multifamily, We've built,
(16:56):
you know, hotels.
So it's interesting that youmentioned that, because I didn't
even think of that in the samevein as.
But it is.
It's this reuse right Reuse ofspace, reuse of a building.
Steven Paynter (17:04):
Yeah, is, but it is.
It's this reuse right reuse ofspace, reuse of a building yeah,
yeah very cool it's surprising,well, unsurprising maybe.
If you put you know, four orfive 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 lotwhere they're densifying the
park around our, our biggermalls, and it's making the
(17:25):
retail much, much moresuccessful just by adding.
You know, it seems obvious, butyou're adding a whole bunch of
residents.
Therefore, you're adding awhole bunch of customers.
Rachel Oh (17:33):
Yeah, yeah, no, super small, super, super smart.
So you know we've been talkingabout office to residential and
I just wanted to kind of touchon like office to something else
.
So we also have done one officeto hotel conversion.
In downtown Phoenix we took ahistoric building and we
(17:54):
converted it to a hotel, so aMoxie by Marriott.
But that one we did with theuse of tax credits and that one
we built during sort of thispost-pandemic, you know, high
cost environment and theninterest rates went up and stuff
.
So our budgets just skyrocketedfrom that one and so it's hard
to assess, like you know, how wewould have approached it.
(18:16):
You know pre-cost kind ofaccelerating the way they did.
But just curious what other youknow adaptive reuses that
you've seen from offices.
And I guess the othercommentary I would love to hear
from you is are tax creditsimportant Because these aren't
inexpensive conversions?
Steven Paynter (18:35):
Yeah, yeah, there's a few things on the pack
there, but the conversions toother uses absolutely the reason
why we like and the marketseems to like conversion to
residential, because in mostmajor cities there's a huge
housing crisis and there's avacancy crisis and you get to
(18:55):
save the embodied carbon of thebuilding.
It kind of solves severalproblems 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 thosethings were really struggling
right, hotels were empty becauseno one could travel and senior
(19:16):
living was dealing with major,you know, health crisis.
That is now starting to pick upagain and we are seeing more uh
, hotel conversions.
We're even seeing conversionsfrom your office to kind of a
health care or lab office or tomake medical office, because
that again is another major needacross America.
So it's it's really that matchbetween where there's a
(19:39):
desperate need and where there'sa desperate problem.
Sure, seeing where you can makethe links, hotels are super
interesting, but they can bechallenging because we already
have, typically in an officeconversion, an issue with the
distance between the elevatorsand the glass and if that's too
far, obviously the units end upvery odd.
Even more challenging are goingto come back to hotel, whether
(20:02):
the units are smaller or therooms are smaller, right?
So if you've got a you know,300 square foot hotel room, then
you've got to have a muchshorter distance from the
elevators to the windows to makeit function.
Rachel Oh (20:18):
Interesting.
Steven Paynter (20:19):
Yeah, lots of opportunities.
And when you do find one, whenyou do find an office building
that's great for a hotel, youreally found something special
and a lot of those projects arehappening.
If you can find the right one,it's like a needle in a haystack
kind of approach, but when youfind it, it's incredible.
Rachel Oh (20:35):
Is it just because of that distance you said, from
the rooms to the elevator whatmakes it more of a needle in a
haystack than a traditionalresidential conversion?
Steven Paynter (20:43):
Yeah, it's typically that.
I mean, if you imagine I'mgoing to do a one bed unit, 600
square feet as an example, a onebed unit, 600 square feet as an
example, and if I come out ofthe elevators and it's 60 feet
from the elevator door to thewindow, which is not unusual,
then my 600 square foot unit atabout 10 feet wide and 60 feet
long, which you know is prettyunpleasant um, we call them like
(21:07):
bowling alley units, but it'svery difficult to lay now.
it's not wide enough to get abedroom and a living space on
the glass gotcha um, by contrast, if you find particularly you
know, as I said, some of the 70sbuildings, that distance was 40
feet or 35 feet, uh, quarterwindow, and then you can get a
five foot corridor and a unitthat's 30 by 20 feet and it's
(21:30):
kind of really nice.
You can get the bedroom andliving space on the glass.
You can go down to a hotel room.
Well, hotel rooms are evensmaller yeah then you need even
less distance from the, from thecorridor to the window, to make
it work properly.
Rachel Oh (21:44):
That's where it can start to get challenging I had
no idea, like I never would haveconsidered those things.
This is why you do what you doand I do what I do, thank
goodness.
But I didn't even think thatyou would have to consider the
distance between the room andthe elevator and the glass and
all that.
So, okay, okay, that makes alot of sense.
Yeah, that again.
This algorithm then accountsfor all of these things.
(22:06):
You must put input all of thisin order to see the viability or
the suitability of a conversionmust 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 theuh, the core to window debt
example.
Um, we look at that.
We look at the average unitsize in the market and then the
algorithm grades your floorplate on a bell curve.
Then of like, are you going toget the perfectly proportioned
unit that's going to sell orrent for the most amount of
money, or are you going to getthe perfectly proportioned unit
that's going to sell or rent forthe most amount of money, or
(22:34):
are you going to get a more andmore constrained unit that will
typically rent for less?
So it's a very kind of finelytuned approach to that.
And not just that everythingfrom parking ratios to elevator
ratios, to ceiling height and soon.
If you look at the 1,200buildings we've done, there's
almost no building with the samescore, because every building
(22:54):
is just slightly different,slightly better or slightly
worse in different metrics.
Rachel Oh (22:59):
Yeah.
So does it make sense to tacklea larger project, for example
for it to do larger buildingsscore higher, and does it also
just pencil better when you lookat the underwriting and whatnot
?
I'm just curious does sizematter in this instance?
Steven Paynter (23:16):
It.
Does you really want to be inthe zone where you can create
between about 100 and 300 units.
So that's big enough that youget some critical mass and some
economies of scale, but not sobig that it's going to take you
two years, three years, to getthem all rented or sold.
And that varies a little bit bymarket.
(23:38):
You might be able to go up to500 units in New York.
You might want to go downcloser to the 100 units in
places like Salt Lake City forexample.
But there is that kind of sweetspot.
The second you get over 400 or500 units.
Then all of a sudden you've gotto find 400 or 500 residents
(24:01):
and that can be challenging todo quickly and you're not making
any money until you've got theunits leased.
So the less there are, thequicker that will happen.
But the less there are youstart to will happen.
But the less there are youstart 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 fitnesscenters, They've got swimming
pools, they've got large loungeareas and whatnot, with these
office buildings not necessarilyhaving that, I guess the ground
level there are some things.
But just curious, are thesebuildings also highly amenitized
?
Are you able to do that and isthat cost efficient?
(24:36):
Does that?
Steven Paynter (24:37):
yeah, typically they are highly amenitized, like
most um residential, and whatwe're finding is you can really
create top of market productthrough 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 officefloor to floor height is two,
three feet taller than a typicalresidential floor height.
So you're already getting unitswith better ceilings, better
(24:59):
glazing and and so on.
But where what you do, theamenities can vary.
And actually we've been reallysuccessful with creating smaller
on-floor amenity spaces in someof these projects.
So taking out the space betweenthe elevators you know where
the washroom and mechanicalspaces were and turning that
into small on-floor amenities.
So instead of the typicalapproach of one big floor where
(25:21):
you've got, you know, 15,000square feet of amenity in one
place, we're breaking it up intotwo or 3,000 square foot
pockets.
What that allows you to do iscreate something a little
different on every floor.
So you might have, as anexample, a kid's play area on
one floor, you might have alittle co-working space on a
floor, you might have a littlespin studio, and.
But then you can createvariation and it's a lot cheaper
(25:44):
to switch those amenities out.
And one thing becomes lesspopular or where you see oh
actually we needed two spinstudios, okay, great, we can
switch out one of them to that alot 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?
(26:05):
uh, most rooftops of officebuildings are just big, empty
yeah kind of pancakes yeah um,so all of the conversions we've
done.
Now we've got rooftop amenitieson there, so actually extending
the elevator and adding stairsup to the roof yeah um to get
that big kind of panoramic roofterrace yeah um, which has been.
You know.
It's amazing, even as officebuildings, why we're not using
(26:28):
these roof spaces more no, no Iknow 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 poolsare expensive.
Like can you put a pool on anold, older building office
rooftop?
Steven Paynter (26:43):
yeah, you can.
You just have to be supercareful.
Um, so you know, we've justfinished rivermark center in
baton rouge that has a smallpool on the roof.
It's positioned over theelevators where it could take
the weight and has stunningviews over the Mississippi.
It's a really nice project.
In others we've put them in thebasement, where it's
(27:08):
structurally a lot easier to doit, so you can put like a small
spa style pool and that could bereally successful, as long as
you make it feel like a spa andnot like a basement.
Rachel Oh (27:16):
Not like a creepy basement.
Steven Paynter (27:19):
Yeah, exactly.
So you just have to really havea good understanding of the
existing building, what it canachieve structurally, and then
you have some creative designsolutions.
It's all all.
All these conversions aredifferent, so everyone requires
a slightly different solutionyeah just have to be with mind
to do something different onthis project than you did on the
(27:40):
last one yeah yep, yep, yepokay, 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 30percent lower cost than new
construction.
Is that still hold true, evenin today's cost environment?
Steven Paynter (27:58):
So, yeah, sometimes we actually see the
prices come in more expensivethan ground up construction, and
that's really one of twofactors Either the building was
not a good conversion candidatein the first place, in which
case there's a lot of thingsabout the building to be fixed
or changed, which increases thecost pretty exponentially.
The other thing is that we arestill seeing contractors really
(28:22):
don't understand the conversionprocess and therefore pressing
in a lot of risk and a lot ofcontingency, of contingency.
So we're trying to really helpthem through that, to help them
understand the existingconditions, help them review the
existing building drawings sothey really know what's there
and that can help bring downprice as well.
But, yeah, you're starting withthe structure, you're starting
(28:43):
with the facade, you're startingwith some of the systems.
You should be 30% less and ifthe project isn't coming in
there and then you really needsome help to understand where
the issues are.
It's interesting to go one ofthese construction sites too,
because you you can actuallyhave you know, rather than the
typical ground up approach ofdoing one floor at time, you can
(29:03):
have people installing drywallon every single floor at the
same time, so you'll have neverseen more people on a
construction site than you wouldif you go into one of these
conversions when they're in fullspeed, and that really speeds
things up too, and um, but yeah,it's, it's sticking around 30
percent cheaper.
And we're still seeing somebuildings come in more expensive
(29:25):
than ground up, but that's oneof two reasons.
Even they weren't a candidatefor conversion in the first
place, right?
So there's a lot of things tofix and that's something that
we've got very good at tellingpeople before they start to just
not start.
And the other thing is thatwe're still seeing contractors
price them with a lot of riskbecause there's not many
(29:46):
contractors out there that havedone this before, done this kind
of work before, so they'repricing in a lot of contingency,
a lot of risk, because theyjust don't know they don't know
what they don't know, and thatagain is a thing we can.
Yeah, exactly.
And again, that's somethingthat we've really worked hard to
develop an approach which helpsreduce that risk.
(30:07):
Typically now, before we evenstart, we'll the to the city and
pull the original buildingpermits.
So I have a whole stack ofdrawings from the 50s and 60s,
all on mylar and stuff, andwe'll completely build a free
digital model of those existingas built drawings, the original
architect, original engineers,drawings, and so now when you
(30:29):
open up a wall, there's no moresaying oh, we didn't realize
there was a column there.
Because we do, because we knowwhat was built in the first
place, and that can help reducerisk, um, and help give people a
bit more confidence that theyknow really what they're bidding
on as well your algorithm seemsquite crucial for the
assessment of a project yeah,it's that first decision making
(30:50):
phase phase.
Do you do this or not?
Yeah, and you should only do itif 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 ourfirm, granted.
We're, you know, kind offocused here on the Mountain
West, so our buildings aren'tnecessarily as old as some of
the ones that you werementioning.
We've also done conversionswhere we will take extended stay
hotels so vintage, like 80s,90s, product first generation
(31:18):
Marriott residences is what wereally like and we'll convert
them to multifamily this on theClass B side, and so we have a
huge workforce housinginitiative that we do and a lot
of what you're describing itsounds like as much as there is
a housing shortage in America,there is a workforce housing,
slash affordable housingshortage.
(31:39):
But it does seem like for thesethings to pencil, we probably
developers would need to createclass A product.
Is that right for these?
Office of residential?
Or can you do office ofresidential and do workforce
housing slash affordable housinglike, does that pencil?
Because I think that's theongoing challenge in housing
development is how do you makeaffordable housing accretive to
(32:03):
the investor?
Steven Paynter (32:04):
it is a real uh challenge and you know we never
quite covered the, theincentives uh before, but that
is key and you're seeingincentive programs from HUD,
from the US federal government.
You're seeing the federalgovernment back low-interest
loans to try and get moreaffordable housing as well, and
(32:25):
I think that is critical to call.
Another interesting approach,actually from one of our clients
who I won't name but theirapproach to affordable housing
is to create really high qualityproducts and manage it well,
and that sounds kind ofridiculous, but they've reduced
the turnover from about 8% ayear to about 2% and that just
(32:49):
means they're getting more rent,because every time someone
leaves an apartment they have torepaint it, they have to wait a
month, and then someone elsemoves 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 qualityproduct produced over to
increase their profitabilityfrom the affordable housing, and
it's such a nice way to do it.
(33:10):
You know what?
What a wonderful way to do aproject to just make the
affordable housing nicer, sothat people stay longer, so that
you get more.
So that kind of approach we'reseeing 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'resaying, make those nicer and
better managed and therefore itdoes become more financially
interesting to the investors.
Then Did I capture thatcorrectly.
Steven Paynter (33:42):
Yeah, I know it sounds unusual, but if you can
reduce turnover and can be asignificantly more interesting
project, it comes down to howyou 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 andevery government seems to have a
slightly different definitionof what that means.
Yes, In Toronto, affordable canjust mean really small because
it's based on monthly rentInteresting.
So there's a real mix.
You know, family affordable,yeah, truly affordable, yeah.
(34:16):
But you can make anything.
We're seeing that, yeah, in theconversions that happen in
calgary, for example.
There's a lot of affordablehousing going in there,
partially backed by the canadianmortgage housing association,
um, but you're seeing anythingfrom that right the way through
to super super luxury like the.
The amount of residences in newyork is an office conversion
(34:39):
project and they are 50 milliondollars and up for a unit.
So wow, not affordableaffordable, or you can be 50
million dollars, yeah, and youcan kind of be anything in
between.
So it just depends where youare and what you want to try and
achieve 50 million.
These are the amman residencesyou say in new york, dang yeah
not one of our projects,unfortunately, but well worth uh
(35:02):
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 ahotel.
I can only imagine what theirresidences must be like.
So that's interesting, okay.
So yeah, let's get back to.
So, you know, our investorseverything, at the end of the
day, has to pencil.
We want to do more affordable,you know, housing type things,
because of course we want to,you know, contribute to our
(35:27):
communities, but it doesn'talways make sense.
So, you know, we mentioned taxcredits 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'reabreast of all these things the
Biden administration hadactually directed the US
Department of Transportation tomake $35 billion in funding
(35:49):
available, and these wereprojects that were close to
transit nodes, or specificallyrail, apparently, and then that
would open up all sorts of loans, and I think there was this
huge commotion that, oh, this isgoing to assist with office to
residential but turns out not so.
Do you know enough about that?
Again, I can read what thearticles share, but I'm just
(36:10):
curious if it was a big enoughimpact that you even know about
it, as you've been talking toall these different developers
about office to residentialconversions.
Steven Paynter (36:17):
Yeah, so I was actually part of the team that
went to the White House in thesummer of last year to help put
that together with the realestate roundtable.
Um, that the office conversionguidebook, as it was called,
from the white house really setsout the groundwork for what
different federal agencies haveto do the department of energy,
(36:38):
department of transportation andand HUD as well.
Yeah, um, it's one thing itdidn't do was really change what
the departments do.
You know, department oftransportation does not normally
build housing, nor does thedepartment of energy.
So the guide a really goodstart.
It sets out the money, it setsout the um, the kind of policy
initiative.
Yeah, what we're finding now,uh, three or four months into it
(37:02):
, is that there are some thingsin there because of the, the
policies were written to buildrail stations, for example.
Yes, um, that make uh, the upstumbling blocks for residential
.
So there's, you know, justweird quirks around
environmental reviews andridership 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 abunch 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 theprogram.
There's others through TIFIA,through the Department of Energy
as well.
None of them are quite thereyet.
So we're now going back throughthe stumbling blocks and weird
kind of anomalies we've found,going back to the different
(37:52):
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 actuallybe to update some of those
policies and get the moneyflowing again okay because it
will make a huge difference.
Yeah, it'll be loaned at justabove treasury rate, which, at
the moment, is four ish percent.
(38:13):
Yes, versus a construction loanright now, which is 10 or 12
percent.
Um, that makes millions ofdollars difference per project,
and so that is something thatwas specifically requested
during the first round of talksand something that should
hopefully start being deliveredthis year with the obvious kind
of time cap of wanting todeliver something before
(38:36):
November Of course, a selectionyear.
Rachel Oh (38:42):
It's always good to be in an election year when
you're making some changes likethat.
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 howapproval for these funds take 18
to 24 months and we know thattraditional closing on funds
take 18 to 24 months and we knowthat traditional, you know,
closing on loans take 60 to 90days.
I mean, there's just, you know,there's time stipulations.
There were all theseenvironmental reviews, and so
that's great.
I and I had no idea that youwere part of that White House
(39:10):
board or group around peoplethat you mentioned that, that
made some commentary on that.
So that's great to hear BecauseI do think it could make an
impact and we could seelandscapes continue to change
across America if they could getthat 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 $200billion between all of the
different programs, thedifferent programs okay, right,
because what I'm?
Rachel Oh (39:40):
talking about is department of transportation
alone.
You're talking about departmentof 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 amusingto me over the last six months
is that we're not speaking todevelopers, who never wanted to
touch federal money before,never wanted to touch federal
incentives or tax abatement, andall of a sudden they're super
interested because that's theonly place to get reasonable
(40:07):
debt at the moment and they needthose incentives to make the
projects work.
Rachel Oh (40:10):
Yeah, well, and we need the projects to work
because, to your point, there'sa housing crisis.
We've got just these buildingsthat we could do something
different with, and I think itcould just add life again, bring
more life back to the cities.
Yeah.
But anyway, kind of piggybackingoff of that, it does seem like
at the end of February this yearGensler was again in the news
(40:33):
as HUD awarded you folks withfunding to analyze conversion
activities in the six cities.
So I imagine you're a big partof that.
Can you tell us a little bitmore 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 aroundhelping cities figure out what
they need to do, what policychanges that they need to make
to make these conversions happenand create housing.
What do they need to do interms of incentives?
Do they need to do things interms of incentives, and how can
(41:06):
they do that in an equitableway?
That's not going to justmassively gentrify or change
neighborhoods and displaceexisting 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 excitingbecause I think it will really
(41:28):
start the guide policy and it'llalso allow cities that aren't
of the scale to be able to dothis research themselves.
It will give them a playbook,it will give them the ability to
see how it could impact theircity, um, and to be able to
streamline that in a way thatthey really wouldn't be able to
without this kind of federallevel, uh approach to it have
(41:48):
you identified the six cities?
you're not the first person toask that question this week.
Um, no, we haven't identifiedthe cities.
We we need to start with theresearch.
Um, so we're gonna, we're gonnanarrow it down from, I think,
three and a half thousand citiesin the us to, um, about 20 that
(42:10):
are worthy of a bit more studyand then get into the six, uh,
final cities.
But the the key really is thatthey're not going to pick the
six you know best cities ininverted 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 citywhich is analogous to 20 other
(42:33):
cities or 50 other cities in theUS, so that anyone in any part
of the country can look at thatstudy for that city and say, oh,
that's kind of like my hometownand therefore I can use that as
an example of what to do here.
So we don't want to pick sixstandard cities that are
one-offs in the country.
We want to pick six that couldreally represent the entire
(42:54):
population.
So finding the six is going tobe, you know that's a challenge
unto itself, but we're excitedto get stuck into it.
Rachel Oh (43:02):
Yeah, well, I'm hoping that Salt Lake City is on
your list only because I thinkwe're representative of a
smaller markets, right?
I think smaller markets needthis kind of data as well, and
so if you're able to help someof these you know these middle
markets are growing, right Helpus to better understand how to
do it.
I'm just putting a little plug.
You know, I'm not even fromhere.
(43:24):
I was born and raised inSeattle, 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 oursmaller communities, would be
great, and Denver's actuallyalready completed an office to
residential study and they havea small incentive program in
place that we help them through.
So there are some cities doingthis on their own already.
We've done about 15 cities inthe US now to help them put
(43:51):
incentive programs together.
But yeah, salt Lake would be agreat example.
I was there just at the end oflast year.
Oh yeah.
Up in Park City and in Salt Lakeas 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 youwant to do I got you.
Or hiking, whatever you want todo I gotcha.
Okay.
Well, I appreciate all this,Steven.
This has been super, superhelpful and has really, you know
, given us a better peek andinsight into office to
(44:26):
residential, you know as kind ofparting words.
Is there anything that youwould want to just maybe
underscore that would help youknow investors when they're
looking at because I think a lotof these groups now are coming
out what would you say issomething that you would just
make sure investors are payingattention to when they're
evaluating potential investmentdeals in these specific office
(44:50):
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 30percent of buildings work.
That's 70 percent of the time.
You're starting with the wrongbuilding, so you can spend a lot
of time and money chasing thatand and ending up, you know,
torturing yourself over it notworking.
(45:13):
Um, so start with the right oneand they can be great and we've
got lots of built examples ofgreat conversion projects that
are really successful but if youstart down the wrong path, you
will never be able to force itback into profitability.
Rachel Oh (45:27):
Okay, and your algorithm is probably one of the
ways in which you can identifythe right building correct.
I mean not trying to like plugyour business, but I mean it
sounds like your algorithm isone of the ways right In which
you can identify the rightbuilding.
Steven Paynter (45:42):
Yeah, absolutely , and that's why we did it,
because you have to be able todo that quickly.
You know it's a fail fastmentality.
Let's find out whether it's theright building or not in a
matter of days and then investlots of time and effort into
making the project work.
Let's not spend six monthsdoing the wrong building and
then, everyone's upset with eachother at the end.
Rachel Oh (46:02):
No, let's not do that .
Let's not do that.
Okay, great Well, Steven, thankyou so much, really, really
appreciate your time, appreciateall your expertise.
Thank you so much for helpingour government, too, figuring
this out right, and I'm lookingforward 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 joinus again?
Yeah, absolutely, and we couldbe at a ship, some kind of
interim things on the way as welearn more, as we identify the
cities, and then we'll behosting a big event about this
time next year to present allthe studies to any city or
developer that's interested inlearning more.
Rachel Oh (46:39):
Oh good.
Well then, definitely, I thinkwe'd love to come, and then
maybe we'll do a follow on fromthat.
That'll be a good one.
Okay, well, Steven, thank youso much.
Thank you for joining us forPeaks and Portfolios by PEG
Companies.
We appreciate your time and welook 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 forthis week's episode of Peaks and
Portfolios.
This has been an incrediblyinformative conversation.
I learned a lot and hope youall did too.
Catch us all next week as wesummit another peak.
Talk to you all soon.
Welcome to Peaks and Portfolios, presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:25):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Welcome everybody, so gladyou're here with us today for
Peaks and Portfolios.
For today's episode we will bediscussing a topic that is
actually a huge area of currentcuriosity and discussion in
(00:47):
commercial real estatedevelopment, and that is
workplace to home place, therise of office conversions and
how to pull them off.
We wanted to bring in today'sguest, Steven Paynter from
Gensler, to help shed lightaround how successful converting
offices into residential reallycan be.
What do we do with all therecord and rather looming office
(01:08):
space vacancies out there, andcan conversions be palatable to
developers and also solve ourhousing issues on so many fronts
?
I feel privileged to introduceyou to today's guest Joining us
from Toronto, gensler's very ownSteven Paynter.
Steven, welcome.
Steven Paynter (01:26):
Hi, thanks very much and good to be speaking to
you today.
Rachel Oh (01:29):
Such a delight, such a delight.
Thank you so much, Steven.
Tell me a little bit aboutyourself.
How long have you been withGensler and how do you have that
amazing British accent?
Steven Paynter (01:41):
I originally kind of got licensed and
qualified in the uk but camehere during the last recession
and came to toronto, basicallybecause there was a huge amount
of work and joined.
Guns are about 10 years ago andI currently lead what we call
our building transformationpractice area worldwide, so
that's anything that touchesexisting conditions, especially
(02:05):
complex existing buildings orexisting sites.
So we have a big practice doingthat.
Obviously, it's top of mind fora lot of people right now.
Rachel Oh (02:13):
Yeah, no, absolutely, and it sounds like your
official title is the GlobalLeader of Building
Transformation and AdaptiveReuse, which is kind of a
mouthful actually, but you'vealso it sounds like you led the
original research team thatdeveloped a conversion algorithm
for this assessment.
(02:34):
About, you know, I guess,assessing office building stock
and the ESG assessment.
Can you tell me a little bitabout that?
Steven Paynter (02:40):
Yeah, absolutely .
So that actually came out of.
You know something that we werelooking at in 2019 when, if you
remember that far backpre-COVID, people were talking
about potential recession and wewent out to developers and said
, hey, what are you worriedabout?
What have you got right nowthat's concerning to you, or
what buildings do you own thatare concerning?
And a lot of them said theclass C and B office wasn't
(03:04):
really doing that well, wedidn't know what to do with it.
We started looking atconversions, but the feeling in
the market then which I knowsome people still feel today is
that conversions were tough topull off, that they're expensive
and that people have beenlooking at them.
They're doing financialanalysis on them.
They couldn't make it work.
(03:25):
At the same time, even back then, we were doing projects.
We were executing projects thatwere getting occupied.
People were living in them andloving them.
So we wanted to answer thequestion of why does it work
sometimes and why is it anightmare sometimes?
And if you assume that all ofthe teams are of equal talent
and the developers are equallyskilled, it really had to come
(03:47):
down to the buildings.
Some buildings work and somebuildings don't.
So the idea behind the algorithmback then was to say can we
quickly identify ones that workversus ones that don't?
Can we do that using data,rather than just really spending
a lot of time designing andrendering and doing all that
kind of fancy, time-consumingarchitecture stuff?
(04:08):
Could we do it with data andcould we give you an answer
straight away?
And that's really where thealgorithm came from.
It's this idea that you cantake an office building, turn
that into a data set, create akind of fictional body locks
residential building, turn thatinto a data set and then use an
algorithm to bridge the gapbetween the two, to say this is
(04:30):
your office building, this isthe dream residential building.
Where are the gaps?
Where is that going to costmoney?
Where is the opportunity thereto do something?
And that's allowed us to reallystreamline the process, and
we've used the algorithm now onover 1,250 buildings across
almost every city and everystate in the US and in Canada as
(04:50):
well, and it's led us to a hugenumber of projects moving
forward and a huge understandingof why some buildings are a
great idea and why others.
You could bang your headagainst the wall all day and
you'd never actually make viableconversion out of them.
Rachel Oh (05:07):
Yeah, I think in your article.
So, again, I might havementioned this earlier, but I
kind of stalked you a little bit, Steven.
So you wrote an article inOctober 2023.
And at that time you hadanalyzed.
It looks like over 300buildings in 25 cities across
North America.
It looks like over 300buildings in 25 cities across
North America and at that time,the data revealed that only 25%
(05:28):
of the buildings scored wereactually suitable candidates for
conversion.
Is that still true or has thatchanged?
Steven Paynter (05:37):
It's changed a little.
The current numbers show 32% ofbuildings are viable.
That's really down to justbasic factors like floor plate.
Can you lay them out forresidential?
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.
(05:59):
So generally older cities thatdon't have a formal city grid,
like parts of Boston for example, they score lower 15% to 20%
there.
And then cities that have thattypical CBD with a fixed city
grid, especially cities thatwere developed in the late 60s,
(06:20):
early 70s, they tend to score alittle higher.
That's just a function of thesize of the buildings and
whether or not they're pointtowers versus big, low buildings
.
But so it's evolved and we'veupdated our scoring approach as
we've learned more and done morebuildings.
But the premise still holdstrue that it's 25% to 30% most
(06:40):
of the time.
Of the buildings we look at area good starting point for a
conversion.
Rachel Oh (06:45):
Okay, so you mentioned floor plate, you
mentioned location, a little bitof building form too, but it
sounds like another piece ofyour analysis includes, I guess,
the surrounding community andif it can sustain a residential
housing.
Is that what you werementioning when you said being
(07:07):
close to something built in likein 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?
Steven Paynter (07:15):
no, it's actually more in terms of form.
So, okay, kind of classic 70soffice building has a relatively
small floor plate, um, it'snormally set back a little from
the sidewalk and it has windowson all sides.
A lot of the older buildingsand you see this in in new york
and other cities as well, andthe 30s 40s buildings were built
(07:37):
right to the lot line on allsides and butt up against the
next, um the next owner as well.
So they struggle honestly a lotof the times because they just
don't have windows on every side, and a lot of the buildings we
studied in Boston only hadwindows on one side and it's
okay for office.
It's not great but obviouslypretty terrible for residential.
Rachel Oh (08:00):
I've heard again this is just me kind of gleaning
back in my memory banks ofthings I've read I've heard that
there are buildings and maybeit was in Manhattan where they
would drill a hole in the middleto create window space in the
middle.
Did I read that right?
Steven Paynter (08:18):
That's right.
So we actually just finished aproject in New York called Pearl
House and that one we actuallytook out the middle of the
building because it wasn'tuseful, so that space where you
know, in a typical officebuilding the washrooms would be,
for example.
I took that space out and thatallowed us firstly an area to do
(08:38):
mechanical risers, but it alsoreduced the density of the
building and the weight of thebuilding and that allowed us to
build some really good penthousespace on the top for amenities
and penthouse units.
So you can do that, you cantake out the middle of the
building if it isn't usefulspace, or you can use that
middle piece for amenities,which we've done on projects in
(08:59):
Philadelphia, for example.
Or, if you're really lucky,you'll find a building that just
really doesn't have much thatspace and you can get a really
efficient floor plate.
And but all of those are kindof cost factors or value factors
.
Rachel Oh (09:12):
be that drive what our scoring shows it sounds
really expensive to take out achunk of the middle of the
building.
It sounds quite costprohibitive in the way you
explain it, you know, does it?
Steven Paynter (09:25):
I mean it must pencil in the end what you can
do with it okay yeah, it dependson two things you're where you
are and then what you do withthat space.
So if you're in new york, forexample, the value of the
residential is really highprobably one of the highest in
the country and that means youcan do a lot more, you can spend
a lot more money and still getthe returns to work, and you can
(09:48):
spend that money to create areally high quality, high value
product at the end.
But if you can take that spaceout and use the GFA to build
more space on the roof, thenyou're actually taking away less
valuable space and adding greatspace.
Got it?
And the Pearl House example ifyou go on the roof up there the
views of the rivers you can seethe Hudson and the East River.
(10:11):
It's just absolutely incredible.
So you can use that to bringreal added value and added
high-quality space if you get itright.
Rachel Oh (10:20):
Is the Pearl House open now, then?
Are there residents living init?
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 30Minutes, whatever they call it.
We did that there at the end oflast year and you can see it
under construction as well.
So I feel that's stillavailable online if you want to
search it out.
Rachel Oh (10:46):
Oh, I definitely want to.
I mean, you know, obviously I'min this business and so you
know real estate development isat our heart and core, and so I
love it.
But just as a citizen of theworld, and you know, as we see
city landscapes changing becauseoffice buildings are, you know,
the pandemic just changed theway we view an office and you
(11:08):
know how people, you know, spendtheir average workday.
So I love seeing how we can dosomething, because it does seem
like a travesty, you know, tohave all these empty buildings
and to have no viable use.
So I love, love, love thistopic.
Even if I weren't in thebusiness, I think I would find
this super fascinating.
Love this topic.
Even if I weren't in thebusiness, I think I would find
this super fascinating.
(11:33):
Okay, so it sounds like, then,really truly, this 25 now to 30%
viability of buildings beingsuitable for conversion, really
do the way you.
The algorithm is just purely onthe form of the building.
You're not necessarilyconsidering the surrounding
communities, you're justconsidering the integrity of the
building itself and whether ornot it's suitable, and so 25 to
30 percent does not seem like alot.
I mean, what do you do with therest?
Is there any hope?
(11:53):
I mean, can you convert tohotels?
For example, is it only forresidential?
Could you do something else?
Could you convert to hotels?
Or is there another usage forthat?
You know 60, 70 percent yeah, Imean the.
Steven Paynter (12:08):
I think people often think 25, 30 isn't, isn't
enough, but current vacancy isjust over 20 percent, right, so
you don't need to convert 100 ofoffice buildings, you just need
to reduce the vacancy down towhat it was, uh previously.
And calgary, where we did ourfirst major study back in 2021,
(12:28):
is a really good example.
There's about 120 officebuildings in the city and the
city, through their incentiveprograms, 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 willhalve the amount of vacancy that
(12:49):
they had.
So you don't need to convertevery office building, because
not every office building isvacant.
If there's a 20% vacancy in acity, you probably need to take
away half of that to get down toa sustainable level, so you
need to convert 10%.
It's finding the ones thatshould be converted and then
finding the ones that shouldremain office and then finding
(13:11):
the ones that have a differentfuture use.
That's really the key andthat'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 weactually have done an office to
residential conversion in SaltLake City.
Granted, we're on this topic.
I don't know if I told you, butwe actually have done an office
to residential conversion inSalt Lake City.
Granted, we're a tiny market,much smaller market than the
markets that you just mentioned.
It was a 48,000 roughly squarefoot, so tiny building.
There were four floors but weonly converted the three because
(13:39):
the fourth floor were condos,so we couldn't necessarily touch
them.
I think we will and I spokewith the group.
We converted them into 43 unitsand it's a great project.
It looks great.
There were certain stipulations.
We couldn't touch the exterior.
The city was pretty adamantabout that and we learned a ton
(14:01):
and they told me the biggestthing that the architect at the
time had not considered wassound transference.
So we had a huge soundtransference issue and so, as a
result, we now have to go backin and fix that, but you know,
for all intents and purposes itwas quite successful.
You've been looking at thesebig urban locations in historic
cities.
What have you done with, like,maybe the more suburban markets
(14:29):
and any thoughts there aboutyour same algorithm, or has this
been applied to all sorts ofmarket sizes?
Steven Paynter (14:36):
Yeah, we've really applied it to all market
sizes and types of city, andactually one thing that we've
done with the algorithm istailoring by city.
So if I, for example, take abuilding in a major urban
location San Francisco, new York, toronto or whatever we'll use
a smaller average unit sizebecause that's what the market
(14:58):
is after.
We'll use a different parkingratio, we'll use a different
requirement for loading, forexample, as well, and so if I'm
looking at a building in newyork, it's pretty common to have
zero parking and to have noloading bay.
So you just have to drag yourfurniture across the sidewalk
into the building wow, um and tohave a, you know, 500 square
foot unit.
I couldn't do that in salt city, for example.
(15:20):
You know you'd have to haveparking, you'd have to have yes,
uh, proper loading.
You'd have to have parking you'dhave to have proper loading,
you'd have to have larger units,and so we've actually tailored
the algorithm to know where thebuilding is and what that market
wants, which is absolutelycritical to it.
The suburban pieces it's kindof interesting because as well
as doing these just normalstraight conversions, we're also
(15:43):
looking at what you do withmore suburban markets, and a lot
of the time that means maybeconverting the office, but
generally suburban office platesare bigger.
it often means densifying thesite and there's a you know, a
lot of that kind of workhappening right now taking
suburban malls or suburbanoffice parks, removing surface
(16:05):
parking, building more densityon there and trying to turn
those into more of a mixed usecommunity.
So it's similar to what we'redoing in in cbd's trying to mix
the use in there to get thatvibrancy and the kind of a
different approach it's,building new rather than just
altering what was there, and Ithink that's key.
We have have to, you know, tostop massive sprawl.
(16:26):
We do have to take some ofthese suburban locations and do
something more important withthem.
Rachel Oh (16:32):
Yeah, it's interesting you mentioned that
We've done.
We also have, you know, we dohotels as well, and so we have
built hotels on former mallsites, because in the US the
malls are massive or traditionalmalls and they have these huge
parking lots and since everyonenow just shops online, the
parking lots are just completelyempty.
So we've gone in and we'vebuilt multifamily, We've built,
(16:56):
you know, hotels.
So it's interesting that youmentioned that, because I didn't
even think of that in the samevein as.
But it is.
It's this reuse right Reuse ofspace, reuse of a building.
Steven Paynter (17:04):
Yeah, is, but it is.
It's this reuse right reuse ofspace, reuse of a building yeah,
yeah very cool it's surprising,well, unsurprising maybe.
If you put you know, four orfive 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 lotwhere they're densifying the
park around our, our biggermalls, and it's making the
(17:25):
retail much, much moresuccessful just by adding.
You know, it seems obvious, butyou're adding a whole bunch of
residents.
Therefore, you're adding awhole bunch of customers.
Rachel Oh (17:33):
Yeah, yeah, no, super small, super, super smart.
So you know we've been talkingabout office to residential and
I just wanted to kind of touchon like office to something else
.
So we also have done one officeto hotel conversion.
In downtown Phoenix we took ahistoric building and we
(17:54):
converted it to a hotel, so aMoxie by Marriott.
But that one we did with theuse of tax credits and that one
we built during sort of thispost-pandemic, you know, high
cost environment and theninterest rates went up and stuff
.
So our budgets just skyrocketedfrom that one and so it's hard
to assess, like you know, how wewould have approached it.
(18:16):
You know pre-cost kind ofaccelerating the way they did.
But just curious what other youknow adaptive reuses that
you've seen from offices.
And I guess the othercommentary I would love to hear
from you is are tax creditsimportant Because these aren't
inexpensive conversions?
Steven Paynter (18:35):
Yeah, yeah, there's a few things on the pack
there, but the conversions toother uses absolutely the reason
why we like and the marketseems to like conversion to
residential, because in mostmajor cities there's a huge
housing crisis and there's avacancy crisis and you get to
(18:55):
save the embodied carbon of thebuilding.
It kind of solves severalproblems 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 thosethings were really struggling
right, hotels were empty becauseno one could travel and senior
(19:16):
living was dealing with major,you know, health crisis.
That is now starting to pick upagain and we are seeing more uh
, hotel conversions.
We're even seeing conversionsfrom your office to kind of a
health care or lab office or tomake medical office, because
that again is another major needacross America.
So it's it's really that matchbetween where there's a
(19:39):
desperate need and where there'sa desperate problem.
Sure, seeing where you can makethe links, hotels are super
interesting, but they can bechallenging because we already
have, typically in an officeconversion, an issue with the
distance between the elevatorsand the glass and if that's too
far, obviously the units end upvery odd.
Even more challenging are goingto come back to hotel, whether
(20:02):
the units are smaller or therooms are smaller, right?
So if you've got a you know,300 square foot hotel room, then
you've got to have a muchshorter distance from the
elevators to the windows to makeit function.
Rachel Oh (20:18):
Interesting.
Steven Paynter (20:19):
Yeah, lots of opportunities.
And when you do find one, whenyou do find an office building
that's great for a hotel, youreally found something special
and a lot of those projects arehappening.
If you can find the right one,it's like a needle in a haystack
kind of approach, but when youfind it, it's incredible.
Rachel Oh (20:35):
Is it just because of that distance you said, from
the rooms to the elevator whatmakes it more of a needle in a
haystack than a traditionalresidential conversion?
Steven Paynter (20:43):
Yeah, it's typically that.
I mean, if you imagine I'mgoing to do a one bed unit, 600
square feet as an example, a onebed unit, 600 square feet as an
example, and if I come out ofthe elevators and it's 60 feet
from the elevator door to thewindow, which is not unusual,
then my 600 square foot unit atabout 10 feet wide and 60 feet
long, which you know is prettyunpleasant um, we call them like
(21:07):
bowling alley units, but it'svery difficult to lay now.
it's not wide enough to get abedroom and a living space on
the glass gotcha um, by contrast, if you find particularly you
know, as I said, some of the 70sbuildings, that distance was 40
feet or 35 feet, uh, quarterwindow, and then you can get a
five foot corridor and a unitthat's 30 by 20 feet and it's
(21:30):
kind of really nice.
You can get the bedroom andliving space on the glass.
You can go down to a hotel room.
Well, hotel rooms are evensmaller yeah then you need even
less distance from the, from thecorridor to the window, to make
it work properly.
Rachel Oh (21:44):
That's where it can start to get challenging I had
no idea, like I never would haveconsidered those things.
This is why you do what you doand I do what I do, thank
goodness.
But I didn't even think thatyou would have to consider the
distance between the room andthe elevator and the glass and
all that.
So, okay, okay, that makes alot of sense.
Yeah, that again.
This algorithm then accountsfor all of these things.
(22:06):
You must put input all of thisin order to see the viability or
the suitability of a conversionmust 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 theuh, the core to window debt
example.
Um, we look at that.
We look at the average unitsize in the market and then the
algorithm grades your floorplate on a bell curve.
Then of like, are you going toget the perfectly proportioned
unit that's going to sell orrent for the most amount of
money, or are you going to getthe perfectly proportioned unit
that's going to sell or rent forthe most amount of money, or
(22:34):
are you going to get a more andmore constrained unit that will
typically rent for less?
So it's a very kind of finelytuned approach to that.
And not just that everythingfrom parking ratios to elevator
ratios, to ceiling height and soon.
If you look at the 1,200buildings we've done, there's
almost no building with the samescore, because every building
(22:54):
is just slightly different,slightly better or slightly
worse in different metrics.
Rachel Oh (22:59):
Yeah.
So does it make sense to tacklea larger project, for example
for it to do larger buildingsscore higher, and does it also
just pencil better when you lookat the underwriting and whatnot
?
I'm just curious does sizematter in this instance?
Steven Paynter (23:16):
It.
Does you really want to be inthe zone where you can create
between about 100 and 300 units.
So that's big enough that youget some critical mass and some
economies of scale, but not sobig that it's going to take you
two years, three years, to getthem all rented or sold.
And that varies a little bit bymarket.
(23:38):
You might be able to go up to500 units in New York.
You might want to go downcloser to the 100 units in
places like Salt Lake City forexample.
But there is that kind of sweetspot.
The second you get over 400 or500 units.
Then all of a sudden you've gotto find 400 or 500 residents
(24:01):
and that can be challenging todo quickly and you're not making
any money until you've got theunits leased.
So the less there are, thequicker that will happen.
But the less there are youstart to will happen.
But the less there are youstart 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 fitnesscenters, They've got swimming
pools, they've got large loungeareas and whatnot, with these
office buildings not necessarilyhaving that, I guess the ground
level there are some things.
But just curious, are thesebuildings also highly amenitized
?
Are you able to do that and isthat cost efficient?
(24:36):
Does that?
Steven Paynter (24:37):
yeah, typically they are highly amenitized, like
most um residential, and whatwe're finding is you can really
create top of market productthrough 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 officefloor to floor height is two,
three feet taller than a typicalresidential floor height.
So you're already getting unitswith better ceilings, better
(24:59):
glazing and and so on.
But where what you do, theamenities can vary.
And actually we've been reallysuccessful with creating smaller
on-floor amenity spaces in someof these projects.
So taking out the space betweenthe elevators you know where
the washroom and mechanicalspaces were and turning that
into small on-floor amenities.
So instead of the typicalapproach of one big floor where
(25:21):
you've got, you know, 15,000square feet of amenity in one
place, we're breaking it up intotwo or 3,000 square foot
pockets.
What that allows you to do iscreate something a little
different on every floor.
So you might have, as anexample, a kid's play area on
one floor, you might have alittle co-working space on a
floor, you might have a littlespin studio, and.
But then you can createvariation and it's a lot cheaper
(25:44):
to switch those amenities out.
And one thing becomes lesspopular or where you see oh
actually we needed two spinstudios, okay, great, we can
switch out one of them to that alot 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?
(26:05):
uh, most rooftops of officebuildings are just big, empty
yeah kind of pancakes yeah um,so all of the conversions we've
done.
Now we've got rooftop amenitieson there, so actually extending
the elevator and adding stairsup to the roof yeah um to get
that big kind of panoramic roofterrace yeah um, which has been.
You know.
It's amazing, even as officebuildings, why we're not using
(26:28):
these roof spaces more no, no Iknow 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 poolsare expensive.
Like can you put a pool on anold, older building office
rooftop?
Steven Paynter (26:43):
yeah, you can.
You just have to be supercareful.
Um, so you know, we've justfinished rivermark center in
baton rouge that has a smallpool on the roof.
It's positioned over theelevators where it could take
the weight and has stunningviews over the Mississippi.
It's a really nice project.
In others we've put them in thebasement, where it's
(27:08):
structurally a lot easier to doit, so you can put like a small
spa style pool and that could bereally successful, as long as
you make it feel like a spa andnot like a basement.
Rachel Oh (27:16):
Not like a creepy basement.
Steven Paynter (27:19):
Yeah, exactly.
So you just have to really havea good understanding of the
existing building, what it canachieve structurally, and then
you have some creative designsolutions.
It's all all.
All these conversions aredifferent, so everyone requires
a slightly different solutionyeah just have to be with mind
to do something different onthis project than you did on the
(27:40):
last one yeah yep, yep, yepokay, 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 30percent lower cost than new
construction.
Is that still hold true, evenin today's cost environment?
Steven Paynter (27:58):
So, yeah, sometimes we actually see the
prices come in more expensivethan ground up construction, and
that's really one of twofactors Either the building was
not a good conversion candidatein the first place, in which
case there's a lot of thingsabout the building to be fixed
or changed, which increases thecost pretty exponentially.
The other thing is that we arestill seeing contractors really
(28:22):
don't understand the conversionprocess and therefore pressing
in a lot of risk and a lot ofcontingency, of contingency.
So we're trying to really helpthem through that, to help them
understand the existingconditions, help them review the
existing building drawings sothey really know what's there
and that can help bring downprice as well.
But, yeah, you're starting withthe structure, you're starting
(28:43):
with the facade, you're startingwith some of the systems.
You should be 30% less and ifthe project isn't coming in
there and then you really needsome help to understand where
the issues are.
It's interesting to go one ofthese construction sites too,
because you you can actuallyhave you know, rather than the
typical ground up approach ofdoing one floor at time, you can
(29:03):
have people installing drywallon every single floor at the
same time, so you'll have neverseen more people on a
construction site than you wouldif you go into one of these
conversions when they're in fullspeed, and that really speeds
things up too, and um, but yeah,it's, it's sticking around 30
percent cheaper.
And we're still seeing somebuildings come in more expensive
(29:25):
than ground up, but that's oneof two reasons.
Even they weren't a candidatefor conversion in the first
place, right?
So there's a lot of things tofix and that's something that
we've got very good at tellingpeople before they start to just
not start.
And the other thing is thatwe're still seeing contractors
price them with a lot of riskbecause there's not many
(29:46):
contractors out there that havedone this before, done this kind
of work before, so they'repricing in a lot of contingency,
a lot of risk, because theyjust don't know they don't know
what they don't know, and thatagain is a thing we can.
Yeah, exactly.
And again, that's somethingthat we've really worked hard to
develop an approach which helpsreduce that risk.
(30:07):
Typically now, before we evenstart, we'll the to the city and
pull the original buildingpermits.
So I have a whole stack ofdrawings from the 50s and 60s,
all on mylar and stuff, andwe'll completely build a free
digital model of those existingas built drawings, the original
architect, original engineers,drawings, and so now when you
(30:29):
open up a wall, there's no moresaying oh, we didn't realize
there was a column there.
Because we do, because we knowwhat was built in the first
place, and that can help reducerisk, um, and help give people a
bit more confidence that theyknow really what they're bidding
on as well your algorithm seemsquite crucial for the
assessment of a project yeah,it's that first decision making
(30:50):
phase phase.
Do you do this or not?
Yeah, and you should only do itif 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 ourfirm, granted.
We're, you know, kind offocused here on the Mountain
West, so our buildings aren'tnecessarily as old as some of
the ones that you werementioning.
We've also done conversionswhere we will take extended stay
hotels so vintage, like 80s,90s, product first generation
(31:18):
Marriott residences is what wereally like and we'll convert
them to multifamily this on theClass B side, and so we have a
huge workforce housinginitiative that we do and a lot
of what you're describing itsounds like as much as there is
a housing shortage in America,there is a workforce housing,
slash affordable housingshortage.
(31:39):
But it does seem like for thesethings to pencil, we probably
developers would need to createclass A product.
Is that right for these?
Office of residential?
Or can you do office ofresidential and do workforce
housing slash affordable housinglike, does that pencil?
Because I think that's theongoing challenge in housing
development is how do you makeaffordable housing accretive to
(32:03):
the investor?
Steven Paynter (32:04):
it is a real uh challenge and you know we never
quite covered the, theincentives uh before, but that
is key and you're seeingincentive programs from HUD,
from the US federal government.
You're seeing the federalgovernment back low-interest
loans to try and get moreaffordable housing as well, and
(32:25):
I think that is critical to call.
Another interesting approach,actually from one of our clients
who I won't name but theirapproach to affordable housing
is to create really high qualityproducts and manage it well,
and that sounds kind ofridiculous, but they've reduced
the turnover from about 8% ayear to about 2% and that just
(32:49):
means they're getting more rent,because every time someone
leaves an apartment they have torepaint it, they have to wait a
month, and then someone elsemoves 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 qualityproduct produced over to
increase their profitabilityfrom the affordable housing, and
it's such a nice way to do it.
(33:10):
You know what?
What a wonderful way to do aproject to just make the
affordable housing nicer, sothat people stay longer, so that
you get more.
So that kind of approach we'reseeing 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'resaying, make those nicer and
better managed and therefore itdoes become more financially
interesting to the investors.
Then Did I capture thatcorrectly.
Steven Paynter (33:42):
Yeah, I know it sounds unusual, but if you can
reduce turnover and can be asignificantly more interesting
project, it comes down to howyou 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 andevery government seems to have a
slightly different definitionof what that means.
Yes, In Toronto, affordable canjust mean really small because
it's based on monthly rentInteresting.
So there's a real mix.
You know, family affordable,yeah, truly affordable, yeah.
(34:16):
But you can make anything.
We're seeing that, yeah, in theconversions that happen in
calgary, for example.
There's a lot of affordablehousing going in there,
partially backed by the canadianmortgage housing association,
um, but you're seeing anythingfrom that right the way through
to super super luxury like the.
The amount of residences in newyork is an office conversion
(34:39):
project and they are 50 milliondollars and up for a unit.
So wow, not affordableaffordable, or you can be 50
million dollars, yeah, and youcan kind of be anything in
between.
So it just depends where youare and what you want to try and
achieve 50 million.
These are the amman residencesyou say in new york, dang yeah
not one of our projects,unfortunately, but well worth uh
(35:02):
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 ahotel.
I can only imagine what theirresidences must be like.
So that's interesting, okay.
So yeah, let's get back to.
So, you know, our investorseverything, at the end of the
day, has to pencil.
We want to do more affordable,you know, housing type things,
because of course we want to,you know, contribute to our
(35:27):
communities, but it doesn'talways make sense.
So, you know, we mentioned taxcredits 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'reabreast of all these things the
Biden administration hadactually directed the US
Department of Transportation tomake $35 billion in funding
(35:49):
available, and these wereprojects that were close to
transit nodes, or specificallyrail, apparently, and then that
would open up all sorts of loans, and I think there was this
huge commotion that, oh, this isgoing to assist with office to
residential but turns out not so.
Do you know enough about that?
Again, I can read what thearticles share, but I'm just
(36:10):
curious if it was a big enoughimpact that you even know about
it, as you've been talking toall these different developers
about office to residentialconversions.
Steven Paynter (36:17):
Yeah, so I was actually part of the team that
went to the White House in thesummer of last year to help put
that together with the realestate roundtable.
Um, that the office conversionguidebook, as it was called,
from the white house really setsout the groundwork for what
different federal agencies haveto do the department of energy,
(36:38):
department of transportation andand HUD as well.
Yeah, um, it's one thing itdidn't do was really change what
the departments do.
You know, department oftransportation does not normally
build housing, nor does thedepartment of energy.
So the guide a really goodstart.
It sets out the money, it setsout the um, the kind of policy
initiative.
Yeah, what we're finding now,uh, three or four months into it
(37:02):
, is that there are some thingsin there because of the, the
policies were written to buildrail stations, for example.
Yes, um, that make uh, the upstumbling blocks for residential
.
So there's, you know, justweird quirks around
environmental reviews andridership 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 abunch 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 theprogram.
There's others through TIFIA,through the Department of Energy
as well.
None of them are quite thereyet.
So we're now going back throughthe stumbling blocks and weird
kind of anomalies we've found,going back to the different
(37:52):
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 actuallybe to update some of those
policies and get the moneyflowing again okay because it
will make a huge difference.
Yeah, it'll be loaned at justabove treasury rate, which, at
the moment, is four ish percent.
(38:13):
Yes, versus a construction loanright now, which is 10 or 12
percent.
Um, that makes millions ofdollars difference per project,
and so that is something thatwas specifically requested
during the first round of talksand something that should
hopefully start being deliveredthis year with the obvious kind
of time cap of wanting todeliver something before
(38:36):
November Of course, a selectionyear.
Rachel Oh (38:42):
It's always good to be in an election year when
you're making some changes likethat.
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 howapproval for these funds take 18
to 24 months and we know thattraditional closing on funds
take 18 to 24 months and we knowthat traditional, you know,
closing on loans take 60 to 90days.
I mean, there's just, you know,there's time stipulations.
There were all theseenvironmental reviews, and so
that's great.
I and I had no idea that youwere part of that White House
(39:10):
board or group around peoplethat you mentioned that, that
made some commentary on that.
So that's great to hear BecauseI do think it could make an
impact and we could seelandscapes continue to change
across America if they could getthat 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 $200billion between all of the
different programs, thedifferent programs okay, right,
because what I'm?
Rachel Oh (39:40):
talking about is department of transportation
alone.
You're talking about departmentof 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 amusingto me over the last six months
is that we're not speaking todevelopers, who never wanted to
touch federal money before,never wanted to touch federal
incentives or tax abatement, andall of a sudden they're super
interested because that's theonly place to get reasonable
(40:07):
debt at the moment and they needthose incentives to make the
projects work.
Rachel Oh (40:10):
Yeah, well, and we need the projects to work
because, to your point, there'sa housing crisis.
We've got just these buildingsthat we could do something
different with, and I think itcould just add life again, bring
more life back to the cities.
Yeah.
But anyway, kind of piggybackingoff of that, it does seem like
at the end of February this yearGensler was again in the news
(40:33):
as HUD awarded you folks withfunding to analyze conversion
activities in the six cities.
So I imagine you're a big partof that.
Can you tell us a little bitmore 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 aroundhelping cities figure out what
they need to do, what policychanges that they need to make
to make these conversions happenand create housing.
What do they need to do interms of incentives?
Do they need to do things interms of incentives, and how can
(41:06):
they do that in an equitableway?
That's not going to justmassively gentrify or change
neighborhoods and displaceexisting 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 excitingbecause I think it will really
(41:28):
start the guide policy and it'llalso allow cities that aren't
of the scale to be able to dothis research themselves.
It will give them a playbook,it will give them the ability to
see how it could impact theircity, um, and to be able to
streamline that in a way thatthey really wouldn't be able to
without this kind of federallevel, uh approach to it have
(41:48):
you identified the six cities?
you're not the first person toask that question this week.
Um, no, we haven't identifiedthe cities.
We we need to start with theresearch.
Um, so we're gonna, we're gonnanarrow it down from, I think,
three and a half thousand citiesin the us to, um, about 20 that
(42:10):
are worthy of a bit more studyand then get into the six, uh,
final cities.
But the the key really is thatthey're not going to pick the
six you know best cities ininverted 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 citywhich is analogous to 20 other
(42:33):
cities or 50 other cities in theUS, so that anyone in any part
of the country can look at thatstudy for that city and say, oh,
that's kind of like my hometownand therefore I can use that as
an example of what to do here.
So we don't want to pick sixstandard cities that are
one-offs in the country.
We want to pick six that couldreally represent the entire
(42:54):
population.
So finding the six is going tobe, you know that's a challenge
unto itself, but we're excitedto get stuck into it.
Rachel Oh (43:02):
Yeah, well, I'm hoping that Salt Lake City is on
your list only because I thinkwe're representative of a
smaller markets, right?
I think smaller markets needthis kind of data as well, and
so if you're able to help someof these you know these middle
markets are growing, right Helpus to better understand how to
do it.
I'm just putting a little plug.
You know, I'm not even fromhere.
(43:24):
I was born and raised inSeattle, 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 oursmaller communities, would be
great, and Denver's actuallyalready completed an office to
residential study and they havea small incentive program in
place that we help them through.
So there are some cities doingthis on their own already.
We've done about 15 cities inthe US now to help them put
(43:51):
incentive programs together.
But yeah, salt Lake would be agreat example.
I was there just at the end oflast year.
Oh yeah.
Up in Park City and in Salt Lakeas 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 youwant to do I got you.
Or hiking, whatever you want todo I gotcha.
Okay.
Well, I appreciate all this,Steven.
This has been super, superhelpful and has really, you know
, given us a better peek andinsight into office to
(44:26):
residential, you know as kind ofparting words.
Is there anything that youwould want to just maybe
underscore that would help youknow investors when they're
looking at because I think a lotof these groups now are coming
out what would you say issomething that you would just
make sure investors are payingattention to when they're
evaluating potential investmentdeals in these specific office
(44:50):
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 30percent of buildings work.
That's 70 percent of the time.
You're starting with the wrongbuilding, so you can spend a lot
of time and money chasing thatand and ending up, you know,
torturing yourself over it notworking.
(45:13):
Um, so start with the right oneand they can be great and we've
got lots of built examples ofgreat conversion projects that
are really successful but if youstart down the wrong path, you
will never be able to force itback into profitability.
Rachel Oh (45:27):
Okay, and your algorithm is probably one of the
ways in which you can identifythe right building correct.
I mean not trying to like plugyour business, but I mean it
sounds like your algorithm isone of the ways right In which
you can identify the rightbuilding.
Steven Paynter (45:42):
Yeah, absolutely , and that's why we did it,
because you have to be able todo that quickly.
You know it's a fail fastmentality.
Let's find out whether it's theright building or not in a
matter of days and then investlots of time and effort into
making the project work.
Let's not spend six monthsdoing the wrong building and
then, everyone's upset with eachother at the end.
Rachel Oh (46:02):
No, let's not do that .
Let's not do that.
Okay, great Well, Steven, thankyou so much, really, really
appreciate your time, appreciateall your expertise.
Thank you so much for helpingour government, too, figuring
this out right, and I'm lookingforward 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 joinus again?
Yeah, absolutely, and we couldbe at a ship, some kind of
interim things on the way as welearn more, as we identify the
cities, and then we'll behosting a big event about this
time next year to present allthe studies to any city or
developer that's interested inlearning more.
Rachel Oh (46:39):
Oh good.
Well then, definitely, I thinkwe'd love to come, and then
maybe we'll do a follow on fromthat.
That'll be a good one.
Okay, well, Steven, thank youso much.
Thank you for joining us forPeaks and Portfolios by PEG
Companies.
We appreciate your time and welook 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 forthis week's episode of Peaks and
Portfolios.
This has been an incrediblyinformative conversation.
I learned a lot and hope youall did too.
Catch us all next week as wesummit another peak.
Talk to you all soon.
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