The Myth of Affordable Housing

by | May 7, 2026 | Uncategorized


The Real Estate Espresso Podcast
1x
SpotifyPlayer EmbedGoogle PodcastApple PodcastSubscribe via RSSShare Leave a ReviewListen in a New WindowDownloadSoundCloudStitcherSubscribe on AndroidAnchor
Powered by the Simple Podcast Press Player

The Myth of Affordable Housing

Welcome to The Real Estate Espresso podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce.

Today we’re talking about affordable housing, and more specifically whether the most viable path to creating new affordable housing might not be new construction at all.

There’s a very common statement in the housing conversation. It sounds something like this: we need more affordable housing, the implication being that therefore we need to build more affordable housing.

That sounds logical on the surface. But when you examine the economics, the statement falls apart.

New construction today is expensive. Land is expensive. Labor is expensive. Materials are expensive; they’re going up sometimes by the day. Insurance is expensive. Financing, development charges, impact fees, utility connection fees, permitting delays, I mean, the list goes on and on, and that all happens before a single resident ever moves in.

When you add all of that together, the finished product has to command a certain rent just to be financially viable. Rent is often far above what most people would consider affordable. It’s not a function of who owns it. It doesn’t matter who owns it; it’s the underlying cost structure.

This is the central contradiction in affordable housing policy. We ask developers to build affordable housing, but then we impose a cost structure that requires market rents or government subsidy to make the project work.

Now there are exceptions. If land is donated, if tax credits are available, if government grants fill the gap, and if the municipality waives some fees, if financing can be subsidized, then new affordable housing can be built.

But it tells you something important. The project is not affordable because construction is affordable. It’s affordable because someone else absorbed part of the cost. Nothing wrong with that. Subsidy can be appropriate, but subsidy is not a scalable solution by itself. There’s simply not enough public capital to subsidize our way out of a housing shortage.

In fact, some might argue that with the vacancy rates in many cities, there is not a housing shortage. There’s simply a housing shortage at the price point.

So then people say, let’s use older stock for housing. Well, older buildings have a lower cost basis, and you can often buy them for well below replacement cost. Land might have been acquired decades ago. The building might be fully depreciated. That can allow for lower rents.

But then there’s another problem. That housing already exists. Using older housing stock can preserve affordability, but it doesn’t add to the supply of housing. If an older apartment building’s already got residents in it, buying it and keeping rents lower might be socially useful, but it doesn’t create new supply. It doesn’t solve the underlying supply shortage. It just changes who owns the building.

So that brings us to maybe a more interesting thesis. The most viable path to creating affordable housing that actually adds to the housing stock might be the conversion of obsolete office buildings into residential use, especially when those buildings can be purchased at a deep discount to replacement cost.

Now that’s not a universal solution. These projects are not easy, but it might be one of the few places where the economics have a fighting chance.

Let’s start with the problem in office. Many older office buildings are functionally obsolete. They were designed for a work model that no longer exists on the same scale. Companies need less space. Tenants want newer buildings, better amenities, better mechanical systems, and more flexible layouts.

Older Class B and Class C office buildings are being left behind, many of them vacant. The result is distress. Owners face declining occupancy, lower rents, higher interest rates, and refinancing challenges. In some cases, the debt on the building exceeds the value of the asset.

That does create an opportunity. Not because the building’s beautiful, but because the basis might be low enough to make the conversion feasible. If a building costs $300 or $400 per square foot to replace, but could be purchased for $50 or $75 a square foot, that discount becomes the raw material for affordability.

You’re not eliminating construction costs, but you avoid a major portion of the construction cost, namely, the land, the structure, the exterior envelope and, in some cases, the parking.

But office conversion is not just a matter of putting beds where desks used to be. The geometry of the building matters. Residential units need natural light. Large, deep floor plates could be a major problem. Window spacing matters. Location of the core matters. The plumbing stacks matter. Ceiling heights are a factor, and distance from the elevator core to the exterior walls. These are all considerations.

A narrow, older office building might convert beautifully. A deep floor plate tower may not. Some buildings are better suited to micro-units, to student housing, to senior housing, maybe hotel conversion. Some are mixed-income housing. And yet, there’s others that probably should remain office, or maybe be converted to storage, or be demolished outright.

And that’s where investors need to be careful. A low purchase price does not automatically mean a good deal. Sometimes a building is cheap because it deserves to be cheap.

The right way to analyze this is to reverse engineer from the finished housing product. What rent can the target resident actually afford? What unit size makes sense? What operating costs will the building carry after conversion? What will the taxes be after reassessment? What upgrades are going to be required to make it compliant with the code? Will the building need to be sprinklered? Does the building need new elevators, new windows, new mechanicals, new electrical? Maybe some environmental remediation? Is it going to need seismic upgrades or accessibility improvements?

When you add all of that together, does the total investment land at a number that supports affordable rents without requiring any heroics? That’s the test.

The beauty of office conversion is it can potentially thread the needle between two failed models. New construction cannot deliver affordability without subsidy, and existing affordable housing doesn’t add to new supply, but an office conversion could add new units while starting from a distressed commercial basis.

It also addresses two problems at once: it reduces obsolete office inventory and it creates housing in locations that already have infrastructure. They already have transit, utilities, sidewalks, and probably employment nearby.

But policies do need to cooperate. If municipalities want it, they need to move quickly on zoning, parking relief, permitting, building code interpretation, and tax treatment. You cannot ask a developer to create an affordable housing project and then bury the project in two years of bureaucracy. Time kills deals, and uncertainty kills capital.

The best projects will likely involve cooperation between private developers, municipalities, lenders, and in some cases, nonprofit and public sector partners. The public sector may not need to fund the entire affordability gap. Sometimes the most valuable contribution is speed, flexibility, and predictability.

So is office conversion the answer to affordable housing? No. There is no single answer, but it might be one of the most rational answers in certain markets with the right building, with the right purchase price, and with the right approvals and the right team.

Affordable housing is not created by slogans but by math. Where the math works, the capital can show up.

So that’s the opportunity. Find obsolete buildings where the existing value is collapsed and convert them into something society actually needs.

As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.

Stay connected and discover more about my work in real estate and by visiting and following me on various platforms:

Real Estate Espresso Podcast:

Y Street Capital: