How much weight should a residential conversion scenario carry in an office underwriting

A recurring underwriting question in office is how much weight a residential conversion scenario deserves when it shows up in a downside case. Take a 1980s eight story, 140,000 sf, 54 percent leased, where the bear scenario avoids an outright loss because of a line reading something like residential conversion, $185/sf all in, exit at $290/sf. That single line can end up carrying a third of the protected value in the downside case. For anyone who understands the construction side, that number often looks optimistic on its face. Conversion on an eighties floor plate frequently means core-to-window depth that cannot produce a legal bedroom without carving a light well, plumbing risers that do not exist where they are needed, a curtain wall that may not open, and a change of use that has to clear zoning and code in whatever jurisdiction the building sits in, with that last item swinging widely between markets and rarely priced properly in a deck. Structural work of this kind can move a per-square-foot budget into an entirely different number than what was modeled. The counterargument has real weight too. Conversions are happening at genuine volume, obsolete office stock is being refurbished into apartments across many markets, some cities are actively incentivizing it, and buying office at a low basis, say $60/sf, does leave room to absorb real surprises before the deal goes underwater. The more useful underwriting discipline is treating a conversion scenario as a note in the margin, an exit that exists but is unpriced, rather than a real value line with a number attached, unless the sponsor has actually commissioned a feasibility study specific to that floor plate, that jurisdiction, and that structural system. A generic per-square-foot conversion cost pulled from a market report is not underwriting, it is a placeholder, and treating it as load-bearing in a bear case tends to be where these models fail.