Could NY’s work from home moment fuel office-to-residential conversions?

Office demand won’t disappear, but some industry pros say companies may rethink their needs, and landlords may turn to the increasing need for housing

The coronavirus could spark the conversion of New York’s office buildings into residential buildings
The coronavirus could spark the conversion of New York office buildings into residential buildings

The long term impacts of the coronavirus pandemic will not be fully known for months or even years, but one major question has already come up: If now widespread working from home becomes standard practice, what will that mean for New York’s office market?

Some real estate pros maintain that companies and employees will be happier than ever to return to their offices after the crisis subsides, while others are predicting a more permanent decline in demand for office space. And they already have a solution in mind for how commercial landlords could handle this: turn their offices into residential buildings to help alleviate New York’s housing crisis.

“This is not a new idea, and it’s not a new phenomenon,” said Ingrid Gould Ellen, director of the NYU Furman Center for Real Estate and Urban Policy. “In recent years, we’ve seen a number of office-to-residential conversions in Lower Manhattan and other parts of the city.”

But in Manhattan alone, the office leasing market saw more leasing volume in 2019 than any year since 2001, according to Colliers International. Leasing activity in Manhattan ticked up for the fourth year in a row to reach nearly 43 million square feet.

Gould does not expect demand for office space to disappear after the pandemic, but said she could see companies focus more on providing their employees with shared office spaces and flexibility to work remotely when they need to.

She also noted that office-to-residential conversions tend to be an easier way of getting more housing in cities than constructing residential projects from the ground up.

“It could be a way to expand the supply of residential housing without encountering the same kind of community resistance,” she said, “because you’re still keeping the streets safe and the skyline the same.”

The precedent for turning office properties into residential spaces on a broader scale can mainly be found in far smaller cities like Detroit and Toledo, Ohio. Those places have seen demand for office space plummet in recent years, independent of the coronavirus, according to Robin Hacke of the Center for Community Investment at the Lincoln Institute of Land Policy.

For a metropolis like New York, where demand for office space has remained strong, a similar shift would likely depend on how long the pandemic lasts, and how used to working from home companies and employees become.

Proceed with caution

Hacke characterized turning more office buildings into residential buildings as “a modest step” toward solving the affordable housing crisis in cities like New York, but stopped far short of claiming it would be a cure-all. This is especially true given that office landlords could easily decide it makes more economic sense to turn their properties into luxury condos than into affordable apartments.

“I would not assume that it would come close to meeting the built-up need for affordable housing,” she said, “which is a really big gap.”

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And others are skeptical that the pandemic would lead to even a small amount of office-to-residential conversions in the five boroughs.

Jonathan Bowles, executive director at Center for an Urban Future, noted that the city was at a record high for jobs with very little excess office space before coronavirus hit. He expressed concern that taking office space off of the market once the pandemic passes would end up making commercial rents more expensive, just as small businesses start looking to grow again.

“Clearly, the coronavirus pandemic is creating a whole new pattern of work, but it’s far from clear if this will be the case over the long run,” he said. “I think we should assume it will not.”

“I think the city’s economic fundamentals are strong,” he continued, “and I guess I’d suggest caution before taking a lot of office space offline.”

Companies will likely try to make it easier for workers to telecommute in the future, but that doesn’t mean they will view telecommuting as an ideal option, he said.

Bowles predicted that the retail sector is more likely to see lasting changes from coronavirus than the office sector, as retail was already struggling before the pandemic.

“I’m more interested in thinking about could this or does this speed up changes in what we do for storefront retail, and I’m not sure I have the answers,” he said. But for office buildings, he said, “there were still low vacancy rates across the city.”

In a recent interview with The Real Deal, CBRE CEO Mary Ann Tighe said she expects people to have “a renewed appreciation for going to the office” once the pandemic ends, potentially leading to an increase rather than a decrease in demand.

Jordan Barowitz of the Durst Organization made a similar prediction, saying that workers “will be very excited to get back to the office” once they can. If demand does drop, it will likely be due to a broader economic downturn as opposed to companies deciding they don’t want or need as much office space anymore, he said.

“I can’t speak to the depth of economic recession that this will cause,” he said, “but we do expect that people will be happy to get back to the office to do their work.”

Brett Theodos, senior fellow at the Urban Institute, said the strongest impact on office space would likely arrive in the form of general economic hardship. He does not foresee the virus causing any imminent changes to how people work.

“The bigger immediate effect I see on commercial real estate is not from a shift to telework but the layoffs and pending wave of small bankruptcies,” he said. The fallout from that “will mean unpaid rent and less demand until we are back at full strength.”