In the first half of 2024, mortgage maturities were drivers for the New York City office market sales, which saw trades to the tune of $1.27 billion, according to Ariel Property Advisors’ New York City 2024 Mid-Year Sales Report.

However, mortgage maturities affected the office market differently, depending on the asset class. While Class A buildings enjoyed recapitalizations, workouts and refinancings, some Class B and C buildings in less desirable locations and with high vacancy rates faced foreclosure and were handed back to their lenders.

Fortunately, a lucky subset of Class B and C office buildings will be getting a “second act” as buyers picked them up with the intention of converting them into housing. This is a welcomed trend in New York City where the housing vacancy rate is 1.4% and the city is facing a shortage of than 500,000 residential units.

In fact, conversions are becoming so popular Ariel’s research shows that acquisitions for office buildings suitable for this type of redevelopment made up approximately 25% of the $2.2 billion in development sales citywide in the first half of the year.

Office buildings that sold for the purpose of residential conversions accounted for 25% of the $2.2 billion in development sales in New York City in 1H 2024.Ariel Property Advisors

Six Offices Sold in 1H 2024 to be Converted into Housing

Metro Loft was behind the largest office-to-residential acquisition in 1H 2024, taking a 50% stake in the Pfizer Building at 219-235 42nd Street where the firm is developing 1,500 residential rental units. After converting 5 million square feet of office and commercial space in Lower Manhattan into 3,400 units of housing over the last 20+ years, Metro Loft is now bringing its expertise to Midtown.

Additionally, five other office buildings sold in the first half of the year at a basis low enough to make conversion a feasible option, including the following:

• Yellowstone acquired 1740 Broadway from Blackstone for $186 million ($358/SF) in a deed in lieu transaction with a special servicer after a foreclosure at a 69% discount from the building’s previous sale in 2014. The mostly vacant office building is reportedly destined to be converted to residential use.
• GFP Real Estate and TPG Real Estate purchased 222 Broadway from DWS for $148 million ($190/SF), with plans to convert the 776,448 square foot office property into 600 to 800 residential units. The building, which was 31% occupied, last sold for $502 million in 2014.
• TPG Real Estate partnered with Skylight Real Estate Partners and Cannon Hill Capital Partners on the acquisition of 250 Church Avenue where an office-to-residential conversion is planned. Also known as 101 Franklin Street, the building traded for $97 million ($411/SF), a 53% decline from its previous sale price of $205 million in 2019.
• Watermark Capital Group acquired an office building at 175 Pearl Street in Brooklyn for $67 million ($360/SF), a 35% discount from its sale in 2017. A 14-story residential conversion is reportedly planned for the site.
• Sunlight Development acquired the 16-story office building at 95 Madison Avenue for $65 million ($445/SF) and plans to convert it to 70 residential units.

Conversion Trend Gains Momentum

Several developers that acquired conversion candidates in the first six months of 2024 are already in the middle of a number of similar projects.

Metro Loft is partnering with GFP Real Estate to convert a 1.13 million-square-foot office at 25 Water Street into 1,320 units of housing and, with Silverstein Properties, Metro Loft will be leasing 571 units of market-rate housing in the 444,000-square-foot former Goldman Sachs office building at 55 Broad Street. Meanwhile, GFP has filed plans to preserve the iconic 22-story Flatiron Building between Fifth Avenue, Broadway and East 22nd Street and convert it from office use into 60 new homes.

Vanbarton Group also has become an active player in the conversion market, turning a 382,022-square-foot office at 180 Water Street in Lower Manhattan into a high-end residential rental, which it sold in 2017, and currently transforming a 535,543-square-foot Class B office building nearby at 160 Water Street into a residential rental. In recent weeks, the firm entered into a contract to buy 77 Water Street for $95 million with plans to convert the office building into as many as 600 housing units, and plans to purchase 1011 First Avenue in Midtown East from the New York Archdiocese for more than $100 million and convert the 20-story building into housing.

Other significant projects in the pipeline include 80 Pine Street, an 800,000-square-foot Lower Manhattan office tower that Bushburg Properties plans to partially convert into 500 housing units. The building was home to American International Group, Inc. (AIG) until the multinational finance and insurance corporation relocated to Midtown in 2021. In addition, Lalezarian Properties is in the process of an office-to-residential conversion and expansion in Midtown East at 650 First Avenue where it is creating 111 units across 100,000 square feet.

Even major New York City office owners like SL Green and RXR are toying with the idea of repurposing part of their portfolio. Last year, SL Green announced the possibility of converting an 800,000-square-foot, 35-floor Class B office tower it owns at 750 Third Avenue into 543 apartments, of which 20% would be affordable. The building was 92% occupied in 2019 but the occupancy rate plummeted to just 19%, according to Crain’s New York. Additionally, SL Green and RXR are reportedly considering an office-to-residential conversion for a 1.1 million-square-foot, 39-story office tower they jointly own at 5 Times Square, and RXR is exploring a partial conversion of the 34-story Helmsley Building at 230 Park Avenue, the Commercial Observer reported.

State and Local Policies Encouraging Conversions

Government support will be key to the future of office conversions in New York City and fortunately city and state officials are cooperating by passing and proposing policies to facilitate these developments.

New York State Housing Policy

New York State’s housing policy, which was part of the state’s FY 2025 Budget, included the 467-m tax incentive to encourage office-to-residential conversions with an emphasis on creating affordable housing. The policy also allows the city to rezone for larger apartment buildings by lifting the 12 FAR density cap.

To take advantage of the 467-m tax exemption program, 25% of units must be rented at a weighted average of 80% of AMI. In Manhattan (below 96th Street) the tax savings would be 90% of the tax bill, and 65% of the tax bill in other areas of the city. The length of the tax exemption ranges from 25 to 35 years, depending on the commencement date of the project.

The hope is this new tax abatement will spur conversions citywide the way the 421-g tax abatement did in in Lower Manhattan in the 1990s and early 2000s, which led to the conversion of around 13 million square feet of office space to residential use between 1994 and 2006, and nearly 13,000 new apartments in Lower Manhattan between 1990 and 2020, according to a study by the Citizens Budget Commission. The CBC report also found the policy led to the creation of an additional 17,000 units that were converted or built in the area without the tax abatement.

City of Yes for Housing Opportunity

In September, the New York City Planning Commission voted in favor of Mayor Eric Adams’ City of Yes for Housing Opportunity, which will update zoning regulations to encourage office-to-residential conversions. The administration estimates up to 20,000 new units of housing could be created through office conversions. The City of Yes also identified Midtown South, a section primarily zoned for manufacturing, as an area that could be repurposed for housing. The City of Yes proposal is currently being reviewed by the City Council and will be voted on in December.

If it's approved, the City of Yes also will support the conversion of office buildings built post 1961 and before 1991, adding approximately 122 million square feet of eligibility, including in Lower Manhattan.

To streamline the application process, the city launched the Office Conversion Accelerator program, which has already attracted interest from the owners of nearly 70 buildings.

Are All Office Buildings Candidates for Conversion?

In a previous Forbes article, I wrote that not all Class B and C office buildings are candidates for conversion and several factors must be considered including:

• Building structure and floor plates. Residential units have light and air requirements that must be met.
• A path to vacancy. Conversions must allow for renovations without having office tenants in place.
• Zoning. The City of Yes will expand current zoning regulations and, therefore, should increase the number of eligible buildings.
• Low-cost office acquisitions. As noted in the examples above, the buildings sold in 1H 2024 for between $190/SF and $445/SF made them viable contenders for conversion.

Unanswered Questions

However, a number of questions remain:

• Will the 467-m tax incentive be enough to encourage developers to convert office buildings into residential?
• What will happen to buildings that can’t be converted because they’re obsolete?
• If buildings are obsolete, what incentives will be proposed by the city and state to knock them down and build new apartment buildings in their place?

Despite the challenges and unanswered questions, the policy initiatives approved and proposed by the city and state and enthusiasm of developers for office-to-residential conversions will result in additional housing in New York City, which will ultimately benefit both building owners and residential renters alike.