Adams wants to convert offices to residential
Adams wants to convert offices to residential
Summary of the Office Adaptive Reuse Study (Jan 2023)
In today’s note, I will summarize the report on office to residential conversions created by Mayor Adams’s task force. The topic of conversions in NYC is heating up, as evidenced by Larry Silverstein’s $1.5Bn fundraise for office to residential conversions and Metro Loft and GFP’s acquisition of 25 Water street for the purpose of converting it. Instead of you reading the 30 page document, spend a minute or two below to get up to speed.
Recommendations by the task force
Broaden eligibility of buildings that can be converted.
The thinking is that there will be high interest in developing in areas of Manhattan like the financial district because these have looser regulations around conversions. The empirical data supports this. Nearly all conversions in NYC have occurred in downtown Manhattan or Fidi. This is largely because areas outside of Fidi contain only newer offices (post 1960s). Current zoning code strongly limits newer offices from being converted. The recommendation is to make it possible for a greater share of the building stock to be eligible, including buildings from the 1960s, 1970s, and 1980s.
Make conversions smoother and easier to do.
Conversions today are far from the best. The range of options is limited. Office to apartment rentals is the only option allowed for conversion to residential purposes: no supportive housing, no short term rentals. Further, if a building’s envelope is larger than what residential FAR permits, then the developer seeking to do a conversion must not convert the space that exists above the allowable FAR. Also, there are parking requirements. Removing these small but pesky kinks in the process could go a long way – especially removing the FAR cap.
Apply the right incentives to encourage conversions.
Straightforward – building conversions will happen without economic incentives, but there be many more conversions with a 421 g, or adjacent bill that offers economic incentive.
Perspective
New York City boasts the most office space in the US, with more than 600 million square feet, surpassing the combined amount of Dallas and Los Angeles. The offices in NYC generate around $6 billion in property taxes each year, or about 6% of NYC total taxes collected in FY 2021-2022.
Vacancy rates have close to doubled in NY from pre-pandemic levels.
Between 2010 and 2020, approximately 7 million square feet of office space were converted into around 4,300 residential units without government subsidies or other form of financial support. Yellow markers represent all the residential conversions. The green dots represent the hotel conversions.
Moving forward 77% of office-based employees will work in hybrid format: going to the office and staying home.
Not all office buildings effected the same way. The report highlighted that new construction class A office buildings have bounced back from Covid much better due to “flight to quality” as tenants seek amenity-rich “commute-worthy” buildings that will attract employees back to the office.
Challenges:
Not all buildings were created equal – some will be easier to convert than others. See diagram below. Buildings like 180 Water Street, on the right, are harder to convert because of bigger floorplates and curtain-wall facades. In order to perform the conversion, the building required that a courtyard be carved out in the middle of the property. 180 Water Street is emblematic of buildings built after the 1960s.
Some owners are not willing to sell their building in this market perhaps at a loss – especially if they have low interest debt.
Developers need to shoulder a lot of uncertainties in order to convert: rising construction costs, increasing interest rates, and a risk averse lender pool.
Conversions means loss factors on buildings originally designed for other uses goes up. Operators need to consider whether the rent per foot on residential space is worth the loss of net rentable square footage.
Next Step: Adam has announced a rezoning of Midtown. By the time of this article’s publishing more details will have come out!