A New York City Office-to-Residential Conversion Wave Builds

But, over the past year, this logjam seems to have loosened. Government efforts such as New York City’s Office Conversion Accelerator Program, which launched last year; the new 467-m state tax exemption for conversions, with varying benefits depending on factors including a project’s timing and geography; and Mayor Eric Adams’s proposed City of Yes zoning overhaul, which is winding its way through various votes and approvals, are beginning to create optimism among New York developers that conversions can be executed in ways that are profitable and productive in the effort to create more housing.

To give an idea of the growth of conversions in New York City, the decade from 2010 to 2020 saw 34 office-to-residential conversions here, according to the Department of City Planning. But in just the one year since the announcement of the Accelerator program, 69 building owners have expressed interest in potential conversions, a surge that could mark a major turning point in the ability of conversions to help alleviate those two big CRE problems in New York City.

The Office Conversion Accelerator Program provides owners whose conversions can produce at least 50 residential units with one central contact within city government to help ensure their work is code-compliant. This is supposed to eliminate the need for owners and developers to communicate separately with the Department of City Planning, the Department of Buildings, the Department of Housing Preservation & Development, the Board of Standards and Appeals, the Landmarks Preservation Commission and more to ensure they are in compliance with all codes and zoning regulations.

“The Accelerator program has a goal of getting building permits in six months or less for projects that have the right to proceed under zoning,” said Dan Garodnick, the director of the Department of City Planning. “So things like the replacement of windows in landmark buildings requires approval from the Landmarks Commission; changes in interior partitions and things like that which require approvals by the Department of Buildings; Fire Department approval for new alarm systems. These are examples of things that the conversion accelerator aims to assist with for buildings that are otherwise eligible to convert.”

The 4-month-old 467-m tax exemption for a multifamily property requires 25 percent of its units be rented at a weighted average of 80 percent of area median income, with certain other conditions attached. Tax savings will range from 65 to 90 percent, depending on the property’s location, and the length of the benefit — from 25 to 35 years — will be determined by the project’s starting date.

New York State has also fulfilled a major desire for developers in lifting the floor area ratio (FAR) of 12 in certain instances, depending on area zoning requirements and a new development’s percentage of affordable units.

The City of Yes for Housing Opportunity would expand current regulations — which allow for conversions only in buildings constructed before 1961 — to include any building constructed before 1991, and also expand eligibility geographically from buildings in the city’s main office centers to anywhere that residential uses are allowed. City of Yes still needs to be voted on by the City Planning Commission and the City Council, both of which should happen later this year.

Owners of 69 buildings have expressed interest in the Accelerator program. Many are doing so based on the belief that the City of Yes proposal will pass.

“Sixty-nine buildings have expressed interest in converting, and we’ve got four buildings already under construction that will create more than 2,100 new homes,” said Garodnick. “It’s important to note that of the 69 buildings that expressed interest, some of them can be converted as of right, and some of them will need to take advantage of changes in our City of Yes for Housing proposal. We expect to see more movement once the City of Yes proposal is enacted.”

World Trade Center developer Larry Silverstein, who, along with partner Metro Loft Management, is currently converting 55 Broad Street from a 30-story office building to 571 market-rate apartments, believes that efforts like the City of Yes and the Office Conversion Accelerator Program are essential to the city’s progress.

“When a program proves enormously important because it can accelerate the rate of conversions, and considering the magnitude of the need, how can you vote against it?” said Silverstein. “Anytime you have an effort to accelerate the productivity of a program such as this, it has got to be a benefit. It’s got to be additive. To the extent you can do that, you’re helping accelerate housing, which is what the city needs. These additions are very beneficial.”

A glance at recent industry news shows that building conversions seem to be gaining momentum. Earlier this month, GFP Real Estate and TPG Real Estate submitted a Buildings Department application to convert 222 Broadway, a 31-story, 750,000-square-foot office building, into 798 apartments at an estimated cost of $43.6 million. The two companies purchased the building from DWS in June for $150 million. CetraRuddy is listed as the architect on the project.

GFP is no stranger to New York City conversions. The company is working with the Brodsky Organization and The Sorgente Group to convert the Flatiron Building into residential apartments, and is also working with Metro Loft and Rockwood Capital to convert 25 Water Street in Lower Manhattan.

The same week as the GFP/TPG announcement, Commercial Observer also reported that RXR, in conjunction with fellow owner SL Green, is evaluating the potential conversion of all or part of the 1.1 million-square-foot, 39-story office tower at 5 Times Square into residential space. RXR is similarly evaluating the 34-story office tower at 230 Park Avenue.

In a July 2024 Manhattan CRE trends report that indicated a sharp rise in development activity from the second half of last year to the first half of this one, investment sales brokerage Ariel Property Advisors wrote of conversions as a reason for optimism regarding the office market.

“The office market has shown signs of improvement driven by owner-user purchases, in addition to offices that are reportedly being converted into residential housing,” the report read. “This comes as a direct result of initiatives put forward by both the city and the state to make conversions more feasible and to help combat NYC’s housing shortage.”

The report noted that sales of development sites totaling $1.12 billion represented 17 percent of transactions in the first half of 2024.

“This uptick is largely due to the reported conversion of office stock to housing,” the report said. “In fact, approximately 50 percent of the entire dollar volume for the borough are reported conversions.”

“The notion has been that conversions are very difficult to do,” said Ariel’s Shimon Shkury. “You have to have the right zoning, the right floor plate, the right incentives when it comes to tax abatements. [Given the new programs], this is the beginning of what I think could be a trend. It is the first time we’re seeing this amount of transactions and discussions about office conversions.”

The Department of City Planning has indicated that current conversion projects cover a vast range of project sizes, from the 1,300-unit 25 Water Street to 95 Madison Avenue, an office building that was purchased by Sunlight Development from the Sklar family earlier this year for $65 million, and will be converted into a 70-unit residential building.

But Silverstein believes that as the universe of conversions broadens, it will ultimately make more sense for larger projects.

“You need size and scale to make it a productive endeavor,” said Silverstein. “It takes the same amount of time and energy to do a larger building as it does to do a smaller one. So if you’re going to take your time, expertise and financial wherewithal to accomplish a conversion, it might as well be to something that is really productive. If it’s a small project, it really doesn’t have the attractiveness that would otherwise be the case for developers.”

As it happens, the total amount of space the new City of Yes rules could free up for conversion is anything but small time.

“The rule changes would enable another 136 million square feet of office space to be eligible for conversion. That’s as much office space as exists in the entire city of Philadelphia,” said Garodnick. “We think that the rules that inhibit which buildings can convert are holding us back, and we think we could create another 20,000 new homes as part of all of this, which is a meaningful number.”

This all adds up to a rare spate of good news on both the office and housing fronts.

“With an office vacancy rate of 19 percent, office-to-residential conversions are a win-win,” said Garodnick. “They give relief to struggling real estate. They create much needed new housing. And they help us create more vibrant, 24/7 neighborhoods in our business districts. So, we are encouraged by what we are seeing out there.”