Office-to-Residential Conversions-what you need to know

Over the last couple of years, there has been a continuing stream of media articles discussing legal and industry trends concerning the conversion of office buildings into residential buildings. For example, in November 2021, Politico ran an expansive, detailed, and interesting article on office-to-residential conversions called “Cities with empty offices see new room to expand housing” with the subtitle “After Covid, New York, and other cities are weighing whether to convert empty office buildings into affordable housing.”

Note the words “affordable housing.” Every land use conversion in a big city involves navigating a political minefield. Imagine what different feelings would be generated if the subtitle said, “…cities are weighing whether to convert empty office buildings into luxury housing.” Therein lies two of the most significant hurdles for any office-to-residential conversion — politics and economics. Other cities, like Chicago, have also been exploring potential office-to-residential conversions. See this article from The Real Deal. Same hurdles in Chicago — politics and economics.

Politics becomes involved because, generally, conversion from one land use to another requires, at minimum, approval from local and municipal planning commissions/boards and, often, requires a change in the law (a rezoning, for example). These boards can invoke public meeting laws, expose political pressure points, and push agendas.

Economics is always at issue concerning land use. For office-to-residential conversions, the more massive the office building, the less likely that the conversion is economically viable. Currently, in NYC, there are about 1100 total office buildings. Only a tiny fraction of those could even be considered for an office-to-residential conversion. For most, the fair market value of the building as an office building is too high. No amount of sold residential space could add up to the value of the building as office space.

Potential Stumbling Blocks in Conversions

Many NYC office buildings also have the problem of being located in undesirable places or where there are few residential amenities (such as grocery stores and restaurants). In theory, the office-to-residential conversion includes adding such amenities — like luring a grocery chain to a lower-level business condo space –, but this may be difficult. Developers and owners must solve yet another puzzle to make an office-to-residential conversion viable. Also, many NYC office towers have a problem with their window-to-floor space ratio. The greater the floor space, the less window is available for each apartment. Apartments without windows are not particularly appealing and will not command market premium pricing. Small-footprint office buildings, hotels, warehousing, and some industrial spaces are more viable. The latter three bring their own set of unique problems, and, as always, politics and economics intertwine.

Of interest, the State of New York just passed some revised legislation making it easier to convert NYC hotels to residential use. See here. Similar changes might be needed to spur office-to-residential conversions.

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Call the experienced New York commercial lease and real estate attorneys at Wright Law Firm NYC for more information. We provide top-tier commercial real estate legal and legal services for the NYC business community. To schedule a consultation, contact our office by e-mail or call us at (212) 619-1500.