Is a $40 a foot office building really cheaper than just building apartments?

Question

I have one rental closing soon and I have been reading way outside my level, which is probably the problem.

What I picked up: there's a huge glut of old office buildings, some are selling for $40 a square foot when new apartments cost $250 a square foot to build, and cities are giving out tax breaks to convert them. That sounds like buying a dollar for sixteen cents. But then the same articles say conversions cost as much as building from scratch, which can't both be true if the building is nearly free.

Someone in a local group also told me there's a federal historic tax credit that pays 20% of the cost. Is that a thing for any old building or only certain ones? And is there a version of this a person with one rental could even touch, or should I stop reading about it?

Rena Guide · Accepted Answer

The two things you read don't conflict once you separate acquisition from total cost. $40 a foot is what the empty shell costs. Conversion construction is a separate, much larger number, and it's the one that gets compared to new construction. A rough way to hold it in your head: the shell might be 10 to 15 cents of every dollar you spend, and construction, design, permits, and the interest you pay while nothing is rented make up the rest. So the building is genuinely cheap and the project is genuinely expensive at the same time.

On the credit, the federal historic rehabilitation credit applies to income producing buildings that are certified historic, meaning individually listed or certified as contributing to a registered historic district, and the work has to meet the rehabilitation standards for that certification. Most plain postwar office buildings don't qualify. Separately, some states and cities have their own conversion incentives, property tax abatements, or fee waivers, and those vary by state and by city, so the only reliable source is the local program document. Anything involving credits needs a CPA who has done them.

Adaptive reuse in the strict sense means the building's use changes and it gets a new certificate of occupancy. People loosely call any big renovation adaptive reuse, which muddies things when you're reading.

The part that catches new investors is holding cost. On a two year conversion you pay debt service, taxes, and insurance on an empty building the whole time with zero income, and vacant building coverage prices differently than a normal landlord policy. That carry is often what decides whether a project pencils, and it never shows up in the "$40 a foot" headline.

jessreyes12 · Answer

The thing that finally made it click for me is that $40/sf is the price of the shell, and the shell is maybe 10 to 15% of what you end up spending. So yes the building is cheap. The building was never the expensive part.

omar_haddad · Answer

On the "costs as much as building from scratch" line, both statements are describing different halves of the budget. New construction lets you put plumbing wherever it's cheapest to put it. A conversion makes you thread plumbing through a slab someone poured in 1965 for six restrooms. Demolition, abatement, and working inside an existing structure add cost that a greenfield site simply doesn't have. Scope creep on my renovations is bad enough at 2,000 sf. At 40,000 sf with unknown conditions behind every wall it's a different animal.

hannah_west29 · Answer

Numbers version. 40,000 sf building at $40/sf is $1.6m. Say it yields 40 units and conversion runs $200k a unit, so $8m of construction. Add soft costs and carry and you are somewhere near $10m all in, or $250k a unit. Now ask what a finished unit in that submarket is worth and what it rents for. If comparable apartments trade at $180k a unit you've spent $250k to make something worth less than that, and the cheap shell didn't save you. That's the whole test.

gregpowell66 · Answer

@ledger that's the right shape. The one I'd add from the build side is that the per unit number swings on things you can't see in a listing photo. Slab thickness, whether it's post tensioned, riser locations, roof structure capacity if you're adding rooftop mechanical. I've walked buildings where the answer was clearly no within twenty minutes and buildings where it took an engineer three weeks.

samantha_ruiz · Answer

Historic tax credit is not "any old building". The building has to be listed or certified as contributing to a registered historic district, and the work has to follow the rehabilitation standards, which means an architect who does this and a review process. It also runs through your tax return, so you need a CPA who's actually done one. Plenty of 1970s office boxes are old and ugly and nowhere near eligible.

carlos_nunez · Answer

Also the credit isn't a check in the mail. Most sponsors sell the credits to an investor through a partnership structure and the pricing and the legal work eat into the headline 20%. That's a lawyer conversation, not a forum one.

bmoreno23 · Answer

I'm also starting from zero and the thing that helped me was separating "is this strategy real" from "is this strategy mine". It's real. At 40 units it's just not a first deal, in the same way commercial airline piloting is real and not my next career step.

luis_carrera · Answer

The carry point is the one I underestimated for ages. Two years of interest on $8m of construction debt, even drawn gradually, is a number with a comma in it that produces nothing.

Rena Expert · Answer

To make @ledger's test usable, run it as yield on cost. Take stabilized net operating income after realistic vacancy and operating expenses, divide by everything you spent including carry and soft costs, and compare that to the cap rate the finished asset would trade at. If your yield on cost isn't meaningfully above the exit cap, you did two years of hard, risky work for the same return a stabilized buyer got by signing a check.

Work it backwards instead of forwards. At $250k a unit all in, an ordinary apartment operating expense load, and whatever cap rate your market actually prints, you can solve for the rent the project requires. If that rent is $2,400 and the submarket tops out at $1,500, no amount of cleverness on the construction budget fixes it. That's why most obsolete buildings never convert. They're cheap because they're in submarkets where the finished rent doesn't support the work.

The assumption most first models get wrong is unit count. People divide gross square feet by 800 and call it units. Real conversions lose area to corridors, new risers, light courts, amenity space, and the dead middle of a deep floor plate. Efficiency in the 70s is common, sometimes worse, so a 40,000 sf building might yield 30 units rather than 40. That single change moves cost per unit by a third.

Also price the entitlement calendar separately from the construction calendar. Rezonings, design review, and building permits on a change of use run on the city's clock, and your loan has a maturity date on yours. Confirm both in writing before you commit capital.

marcus_hale41 · Answer

@wren if the strategy interests you but the scale doesn't, the passive side of this exists and is covered separately in the capital section of the guide. I look at sponsors doing exactly these conversions and the diligence questions are different, mostly about the sponsor's completed conversions and how the construction contract allocates overruns. Different skill, same underlying thesis.

Is a $40 a foot office building really cheaper than just building apartments?

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