May 12, 2023

Recently, a lot of people have been asking me about real estate conversions.

At first glance, this makes sense. We know that traditional commercial real estate like offices and retail space are struggling. The work-from-home trends that started during the pandemic have not reversed. Inflation and other economic worries are also a drag on commercial real estate.

At the same time, we have a nation-wide housing shortage that is driving home prices and rental rates ever higher.

If there is too much demand for housing and too much supply for offices and retail spaces, why not convert commercial properties to serve the residential market?

The supply and demand dynamics paint a clear, simple picture, but in reality, it’s not that easy.

Residential properties have vastly different layouts than commercial properties. It’s easy to underestimate the time and cost required to make those changes. Also, commercial real estate tends to be located in . . . commercial areas.

Even when zoning does not strictly forbid conversion, these areas are less attractive to potential residents.

The same dynamics apply in the Medical Office Building (MOB) market that we at Alliance love so much.

The medical industry continues to grow, and the market for medical real estate is fairly tight. But as much as landlords might want to convert other commercial properties to serve the medical market, this is not easy.

Like in the residential market, MOBs have their own unique layout needs with substantial build-out costs. Zoning can be an issue. And location matters.

Medical businesses often have very different needs for access to infrastructure (e.g. highways) and related businesses (hospitals, medical referral sources), compared to non-medical businesses.  

The saying in real estate is location, location, location. But this doesn’t mean that a location is simply good or bad. Different business types benefit from different locations.

From our perspective at Alliance, conversions pose very little danger of undermining the competitive position of our properties.

In reality, real estate conversions happen. But they’re not profitable enough or common enough to really impact the MOB market.

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