With average residential real estate prices in Manhattan hovering at $984 a square foot, developers could be forgiven if they’ve leapt at every opportunity to convert office buildings to condominiums.
But even in a hot housing market where developers can make one big profitable windfall with a residential conversion, a handful have chosen to maintain at least some commercial use in their buildings.
For instance, developer Leviev Boymelgreen has maintained office space at 15 Broad Street, otherwise known as Downtown by Philippe Starck. As well, a connected building at 23 Wall Street will keep its office space.
Even so, brisk condominium sales in 15 Broad Street recently persuaded the developer to convert an additional four floors and add 56 residential units to the original 326 planned.
“We’re seeing more demand for that space from the residential side as opposed to the commercial side, so we’re capitalizing on that,” said Bassie Deitsch, director of marketing for Leviev Boymelgreen.
Other real estate companies reportedly have plans for mixed-use projects, such as SL Green Realty Corp. at One Madison Avenue; Nathan Berman and Yaron Bruckner at 67 Wall Street; and R.A.L. Companies & Affiliates at 360 Furman Street in Brooklyn. Certain buildings, such as the Arthur Levitt State office building at 270 Broadway, also done by R.A.L. Companies, and 15 Park Row at City Hall Park, are well-known mixed residential and commercial buildings.
Typically, developers might maintain a partial office use in a building if they can’t easily move out tenants with long-term leases, said James Kuhn, president of the commercial real estate brokerage Newmark.
That may hamper Leviev Boymelgreen’s ability to convert to residential all of 14 Wall Street, a 37-story office tower purchased by the developer for $215 million in September, he said.
Kuhn said another reason some office buildings may not readily convert to residential is their large floorplates.
“Some floor sizes are too big to do efficient residential,” he said. “Sometimes you may be up against a building, and on the bottom five floors, you don’t have enough window space. The issue is typically either floor size, light and air, or occupancy.”
The narrower towers of some office buildings, such as One Madison Avenue, which once housed executive offices, can be most easily converted to residential, with their smaller floorplates and magnificent views, said Paul Massey, founding partner of Massey Knakal Realty Services.
Deitsch said there was only one reason Leviev Boymelgreen chose to maintain a portion of 15 Broad Street as commercial, and that was the popularity of the building as office space. Developers wanted to maintain the rental income.
“Sometimes the building is such coveted office space, it’s just smarter to keep the long-term tenants and have the cash flow,” she said.
Also, residents of the Financial District have been clamoring for retail and services.
“Commercial space down in the Financial District is important, because at night, people need more retail, especially if you’re going to have a residential component,” Deitsch said.
However, developers of 15 Broad Street were unprepared for just how strong the call is for residential units in the Financial District a demand which outweighed the building’s value as a commercial space.
Leviev Boymelgreen “decided to release more units to meet the demand and capitalize on the market,” Deitsch said. “The building, particularly because of the Philippe Starck design, has been selling very quickly.”
Tenants with long-term leases may prevent developers from easily converting 14 Wall Street to residential, she said. Plans are still up in the air.
Zoning can also play a role in whether a developer decides to convert an office building, said Michael Shvo, founder and CEO of the Shvo Group. Shvo will soon be marketing a 600,000-square-foot building in the Wall Street area that is maintaining 150,000 square feet of office space.
“It’s not by choice,” Shvo said. “It’s because the zoning of the building requires that we do a portion of the building as commercial.”
Shvo said marketing a building that still has some office use and that’s been converted to residential above can be a wonderful opportunity. Some property developers have actually built such arrangements, for instance, at the Time Warner Center developed by The Related Companies, or Vornado Realty Trust’s Bloomberg headquarters, with the residential One Beacon Court in the upper portion of the building.
“A partial conversion enhances the overall building, because the residential units start at a much higher floor,” Shvo said. “You end up with a building with better units in general.”
The biggest challenge to marketers is creating a separate brand for the residential and office components. That can be done with separate entrances, Shvo said.
“You try to move tenants with leases to lower floors, so you can have a portion with one elevator bank and entrance as your offices,” he said. “And another elevator bank with its own lobby becomes your residential portion.”
As for the awkwardly large floorplates of some office buildings, there are strategies to work around them, Shvo said.
“We have come up with innovative solutions to use the large plates,” he said. “From home offices to private storage spaces on the floor to private bike bins, you can have amenities on each floor. There are many things you can do with what you would normally call ‘dead space.'”
Converting to residential makes sense as it’s the highest and best use for office buildings currently, Shvo said. Massey agreed, but said: “That’s only today.”
Removal of commercial space will most likely drive up office rents in the near future, he said. Finally, rents have regained parity with levels seen in 2000. “I still think that office building owners are going to be very happy over the next few years,” Massey said. “With the appreciation, that market’s going to catch up.”
Where will that leave owners who have partially converted their buildings?
“You’re kind of,” Massey said, “hedging your bets if you do it halfway.”