Office Conversion Demand is Strong, Despite Several Challenges

Given the challenging commercial office terrain in New York City, it is not surprising that those who construct the city’s massive buildings, like Rob Palumbo, the president and CEO of construction management and general contracting firm Cauldwell Wingate, are seeing massive interest in the possibility of office-to-residential conversions.

“Right now there’s a tremendous amount of interest in converting commercial buildings to residential,” Palumbo told Partner and Regional Real Estate Industry Practice Leader for New York Metro and South Florida at Citrin Cooperman Meyer Mintz on the latest installment of “Coffee With Citrin Cooperman,” a video series hosted by Citrin Cooperman and produced with Commercial Observer.

“Right before the holidays, we walked through two buildings in the same day, and a third that same week, with clients looking to see if they can convert those from commercial to residential,” said Palumbo. “There’s a demand there.”

But while the desire for conversions is clearly strong, Palumbo notes that there are still many challenges ahead, most notably in the makeup of the physical spaces themselves.

“The first thing we look at is the floor plate to see if it makes sense. By code, residential buildings require a lot more natural light and air than a commercial building,” said Palumbo. “Next, we would look at the facade. You need operable windows on a residential building. Not many of the older commercial buildings have those, and even if they do, they’d have to be replaced. The elevator, the core, is usually not in the location where you would want it. Ideally, you’d like to see if you could salvage where it is and make it a little more cost effective. And then the mechanical systems will always need to be upgraded.”

Palumbo does note that there are certain existing buildings in Manhattan that are physically ripe for conversion.

“There’s an abundance of mid-block buildings that are not too wide or too deep, where you could still get effective light and air,” said Palumbo.

Turning their attention to cost, Mintz asked Palumbo if conversions pencil out as more expensive than ground-up construction projects. Palumbo noted that more public assistance is needed to make conversions a widespread phenomenon.

“Unfortunately, they’re still very expensive,” said Palumbo. “The incentives from the government are not there yet.”

Looking ahead to the remainder of 2024 for the construction industry, Palumbo said that rising costs for items like insurance will continue to be an obstacle for getting new projects off the ground and that a replacement for the 421a tax exemption is crucial for new construction.

“I sit on the board of several industry organizations, so I’m at the table with our industry peers and our competition. The consensus is that 2024 is going to be a slower year. A new 421a would certainly help,” said Palumbo. “Right now, New York is experiencing a housing crisis. We’re not building anything affordable for people to live in aside from the upper top tier of the market, which is still strong, but has cooled a bit. A 421a would probably go a very long way.”

“Citrin Cooperman” is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. The entities of Citrin Cooperman & Company, LLP and Citrin Cooperman Advisors LLC are independent member firms of the Moore North America, Inc. (MNA) Association, which is itself a regional member of Moore Global Network Limited (MGNL). All the firms associated with MNA are independently owned and managed entities. Their membership in, or association with, MNA should not be construed as constituting or implying any partnership between them.