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New York

Office-to-resi conversions are financially feasible, but just barely: report

NYC, SF among markets where average rents can cover acquisition and conversion

Report Identifies NYC Offices Ripe for Resi Conversion
(Illustration by The Real Deal)

Progressives have been asking why they should subsidize office conversions in New York City. A new report offers one reason: an up to 80 percent reduction in carbon emissions.

A working paper published by the National Bureau of Economic Research on Monday found that upgrading and converting so-called brown office buildings — energy-inefficient class B and C offices — into green apartments can decrease greenhouse gas emissions by 1.5 million tons, representing an 80 percent reduction.

That calculation assumes that such apartment buildings would produce 25 percent less emissions than a 2030 cap in New York, set under Local Law 97. Rehabilitating existing buildings produces 50 to 75 fewer carbon emissions than new construction, according to the report.  

The financial viability of these conversions depends on several factors, including the ability of developers to purchase older office buildings at a steep (61 percent) discount compared to its pre-pandemic value. 

The report, authored by economists Arpit Gupta of NYU and Stijn Van Nieuwerburgh of Columbia University, and Candy Martinez, a Ph.D. candidate at Columbia, identifies buildings poised for conversion, based on location, floor plate size, vacancy rate and inability to meet the city’s emission caps under Local Law 97.

The paper finds that roughly 10 to 15 percent of office space in U.S. cities is suitable for residential conversion. This could create 171,470 additional housing units across the U.S., and nearly 40,000 in New York City. 

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The report also concludes that the profit margins for office conversions are narrow and precipitously drop when below-market rents are required. In a project with 200 units where 20 percent are set aside for those making 80 percent of the area median income, the 2022 net present value drops from $4.1 million to -$8.6 million. The internal rate of return goes from 16.8 to 12.1 percent, according to the report. 

The paper found that office-to-residential conversions were generally only financially feasible in New York, San Francisco, San Jose, Boston, Washington D.C. and Denver, because average rents are high enough to cover the cost of acquisition and conversion. 

The report highlights the need for state and federal funds, along with local zoning changes, to encourage office conversions.  

The New York state legislature failed to take action on measures that would have eased office-to-residential conversions, including lifting the city’s residential floor area ratio cap. Those efforts were thwarted, in part, by calls to require affordable housing in these conversions, without a subsidy in place. As part of a broader text amendment, the city is planning to expand flexible zoning rules in Lower Manhattan to other parts of the city to allow for more conversions.  

Meanwhile, Silverstein Properties and Metro Loft Management just closed on their $172.5 million acquisition of 55 Broad Street, where the developers hope to pull off one of the largest office-to-residential conversions in the city’s history. The project will include 571 market-rate apartments. 

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ConversionsLocal Law 97Office