Cities counting on sweeping plans to quickly turn half-empty office buildings into new homes might want to listen to Nathan Berman, the longtime go-to guy for residential conversion projects in lower Manhattan.
Berman made his mark on New York City’s financial district before and after 9/11 with Metro Loft, his property development firm known for transforming outdated buildings in the fabled business district into places people want to live.
“The biggest thing that nobody seems to understand is that these aren’t vacant buildings,” Berman said in a phone interview. “Unless you are prepared to do conversions that are done in phases, nothing is happening immediately, regardless of how much money you throw at it.”
That isn’t Berman suggesting badly needed homes in big cities won’t get built out of antiquated offices. He’s convinced they will. But Berman and others with a track record of getting complex office conversions off the ground — and built– insist the task is less of a nip-and-tuck than an urban facelift for the ages.
“This is going to take decades,” said Antonia Botero, principal at MADDPROJECT, a national for-fee development and consulting firm in Utah. “We are not going to figure this out in the next 10 years.”
Sparsely occupied, not vacant
For starters, even half-full buildings aren’t empty.
While the pandemic left many older office properties only sparsely populated, Berman said nearly all lower Manhattan properties that might be considered candidates for New York City’s redevelopment plan still have office tenants with long-term leases in place, sometimes with 3, 4 or more years left.
“There are very few buildings of that scale that are vacant, almost none,” Berman said of downtown New York City offices. “Nobody is going to undertake vacating buildings of that scale,” he said, adding that even one holdout tenant can create headaches for a developer and make the economics of a project very difficult.
“When tenants know you can do it in phases, and build around them, it takes away their ability to stop you, or hijack the project,” he said. “That’s going to be the future of conversions.”
Bankable projects
Botero, who previously worked with Berman on several post-9/11 conversion projects in lower Manhattan, said it took nearly 30 years of history to create the conditions for New York City’s financial district to be ripe for revitalization.
Office-to-residential conversions also need bankable developers with a highly specialized set of skills. Manhattan conversion projects, for example, can be billion-dollar projects that include navigating historical buildings, with lead and asbestos, often built near subway lines. Construction often involves coordinating with Con Edison, New York’s Transit Authority, the fire department and more.
“You need developers who are going to execute, and we just don’t have that many of them,” she said. “It’s like asking a heart surgeon to perform surgery, while riding a unicycle.”
The plans, timeline
New York City unfurled plans in January to turn obsolete office buildings in midtown and lower Manhattan into as many as 20,000 new homes in the next decade, with a clear focus on creating affordable units.
Conversion projects that start with vacant buildings take 18 to 24 months to complete, according to Berman, while transforming buildings in phases, with some paying tenants in place, can take much longer, often three to five years.
“We think there is tremendous potential here,” said Maria Torres-Springer, New York City Deputy Mayor for Economic and Workforce Development in a late-March webinar on office conversions in New York City and beyond. “That’s tens of thousands of New Yorkers who would have access to more homes, if we facilitated this type of conversion.”
New York, like other major cities pushing to create living spaces out of offices, want to ease the path of development by changing local legislation, but also by offering incentives to keep affordable housing in the mix.
Chicago in late March accepted three proposals by developers to help transform its LaSalle Street corridor in the city’s historic financial district into a residential and retail destination. Researchers see potential in San Francisco’s reeling financial district by turning a near 30% office vacancy rate into 11,000 new housing units.
In New York, Torres-Springer said the Mayor’s office has identified about 100 rules and regulations that could be eased to speed along development. Of note, New York state let a lucrative tax-break program, known as 421a, expire last year for developers, which had been a cornerstone of affordable housing developments in New York City for 50 years.
“Why not extend the only program that ever delivered?” said Berman, who with recent projects like 20 Broad Street, a luxury residential overhaul of the former headquarters of the New York Stock Exchange, didn’t rely on city or state incentive programs. Metro Loft, so far, has focused on developing market-rate housing.
Berman said the emphasis by cities to create affordable housing conversions in the wake of the pandemic adds another layer of complexity to development. “It would be a wonderful option to have,” he said.
“It will clearly help with certain projects, but I don’t have a lot of confidence that politicians in Albany and New York City will come together and do something that’s actually economically feasible or viable.”
How it could work
Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia University’s graduate school of business, sees a “perfect storm” bearing down on older office buildings.
Remote work, tighter credit at banks and other factors like zero-emissions goals will cut values of some older office buildings by 70%, he said. On the flip side, his calculations also show large-scale conversions to residential properties almost pencil out if developers can snap up buildings at distressed prices.
“I can easily identify about 10 million square feet, or about 10,000 apartments that could be built in that space,” Van Nieuwerburgh said, during the March webinar on transforming old offices. “But the question is, are these conversion financially viable?”
His calculations suggest they aren’t yet, not without tax abatements or federal government funding. For that, he pointed to potential funding through the U.S. Environmental Protection Agency under provisions of the Inflation Reduction Act that, under his reading, could fit the bill and “subsidize some of this brown-office-to-green-apartments” transformation.
Botero at MADDPROJECT said that despite the heavy-lift of transforming urban landscapes, she’s excited by the prospect of seeing major U.S. cities with plans for the future, plotting out their next chapters.
“We should make super aggressive plans,” she said. “I love that some European cities have 15-20 year plans that they’ve been thinking about them for a long time. I don’t think we should narrow ours to 10 years, and in five years say it doesn’t work. It’s not enough time.”
Berman sees New York City’s fate as already sealed in terms of creating more housing. “It’s not only feasible, it’s going to happen anyway,” he said. “Failing buildings will ultimately be cheap enough. Bricks will be cheap enough to make the economics work.”
This post was originally published on Market Watch
