Converting Empty Office Space into Housing in NYC

In this article, you’ll discover:

• NYC's efforts to convert vacant office space into affordable housing due to high vacancies and falling property values.
• The New York City Office Conversion Accelerator's role in easing the conversion process and zoning regulations.
• Design and structural challenges that complicate conversions.
• High costs leading to more luxury rather than affordable housing units.

One billion empty square feet of office space sits empty across the country, according to CoStar.

Unfortunately, the longer the square footage has sat empty, the more drain it’s caused on the communities it takes up space in.

Record vacancies (and a litany of other factors) have caused the value of modern office space to drop by about 40% of what it was worth pre-pandemic. The inherent misuse of empty space has also dragged down the valuation of property taxes by 40% as well. This means less money is collected all around, infrastructure suffers, and people have even less of a reason to live and work in cities where this is happening.

So, to avoid perpetuating the urban doom loop any further, New York City is speeding up the process of converting this empty office space for other uses. And while this initiative is promising, it is not without its challenges. Let’s discuss all the factors of adaptive reuse so you can stay ahead of the curve as a corporate tenant.

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NYC Office Conversion Accelerator

Until now, strict laws and high costs barred most buildings from entry and all developer interest in conversions. However, the empty space crisis has reached a breaking point in Manhattan.  With a 22% vacancy rate, it's like having over 40 skyscrapers the size of the Chrysler Building sitting empty. This represents a massive issue for the city because the office sector has historically been responsible for 21% of the property taxes.

Mayor Eric Adams has spearheaded multiple initiatives to kill two birds with one stone: cut down wasted office space and build up communities with the creation of more affordable housing.

The most recent project is the New York City Office Conversion Accelerator, which streamlines the conversion of non-residential buildings into housing.

It involves collaboration between city agencies like the Department of City Planning and the Department of Buildings to support building owners in the conversion process. The program helps identify and address barriers, analyze zoning feasibility, and secure necessary permits for conversion projects.

The mayor's office is also proposing regulatory changes to eliminate obstacles to conversions, including expanding eligibility to buildings constructed before 1990 (compared to the current 1961 or 1977 cutoff) and allowing non-residential buildings to convert to housing in any city area where residential uses are permitted.

Overall, these initiatives aim to simplify the conversion process, making it easier for building owners to repurpose their structures for residential use and contributing to the evolution of New York City's real estate landscape.

Phasing in more flexible regulations and programs like these has opened up another 136 million square feet of office space for conversions.

Because of this, 46 additional office buildings have been added to the conversion pipeline.

Avoiding Zoning Issues

Zoning was the initial challenge that this (and other similar initiatives) are targeting around the country. Often, cities do not necessarily want housing in office districts. However, the evolution in the way we live, and work has demanded some flexibility.

For the first time in history, people do not need to work in an immediate proximity of their workplace. This has changed the standard of work/life balance. Cities should adjust accordingly from rigid standards or risk getting stuck down the drain of a doom loop.

So, to make adaptive reuse possible, zoning regulations are the first red tape that needs to come down.

Conversion Complexities and Building Age

Of course, removing zoning hurdles simplifies conversion processes, but unfortunately not enough to make most reuse projects worth it (now.)

The financial feasibility of such projects presents a challenge. The vast majority of offices lack the right structure for simple conversions. The deep floor plates of offices are difficult to carve up into residences that require sufficient natural light.

Some of the most common challenges to converting offices to housing lie in their design:

• Offices are often built with structural columns every 30 feet, which makes residential plumbing, access to natural  lighting, and fresh air difficult.
• Larger floor spaces of offices are difficult to carve out dwellings.
• Post-war buildings intended for air-conditioning use often have sealed windows that don’t open.

In the case of such challenges, the go-to method for developers has been to scoop out an internal portion of the building for a light well. This would allow more apartments to be built of uniform shape and facing into a courtyard removes the lack of natural lighting issue. Because, really who wants to live in an apartment without any windows?

This technique is being utilized by the developers at 25 Water St. as the construction involves carving out two courtyards from the center of the building and wrapping apartments around them. And its success may usher in a new era of conversions in NYC.

However, some pre-war buildings are already constructed in a way that lends themselves to simpler conversion processes. In the earlier 20^th century (and prior to AC’s and vast HVAC systems) functioning windows were necessary for sufficient light and ventilation. Before fluorescent lighting, interior windows did not tend to be more than 30 feet from an openable window. As such, pre-war buildings translate better to carve up residential spaces.

Conversion Costs and Challenges to Affordable Housing

Still, the cost of most conversion processes is still too high to garner strong interest from developers.

Because of this significant initial cost, most housing conversions are for market-rate luxury apartments rather than the affordable housing the city is trying to provide. This invalidates most of the available subsidies and relief developers could receive from the government to simplify conversions. Because often they come with the caveat that a certain number of affordable units must be created.

It’s a complicated dynamic. Luxury buildings provide a more appealing return on investment. So even though affordable housing is what is really needed, it will not necessarily dominate the conversion pipeline.

 
That is, at least, until the value of offices drops further.

Future Potential for Conversions

Despite the challenges to conversions, they are one of the only suggested solutions to the wasted space problem which grows more severe by the day.

Mounted with the pressure of billions of dollars in delinquent loans coming due in the next few years,  proactive measures are necessitated to mitigate the issue.

The value of office spaces has dropped by at least  40% since the pandemic, and interest rates have doubled. About 30% of loans are tied to commercial real estate, posing a serious risk amid rising delinquencies. Banks are still supporting these properties, even as their values decline.

As banks acquire distressed properties, there's a need for strategic actions. Converting buildings becomes crucial in repurposing unused spaces and addressing broader economic challenges in the real estate sector.

And as more lease expirations are coming, we may see more buildings added to the conversion pipeline. If cities like
New York continue to simplify the conversion process, it can chip away at the wasted square footage dilemma and make conversions a more realistic solution.

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