Can MetroLoft’s Pfizer Building Conversion Make A Profit?

Two buckled columns and a partial stop-work order are complicating the future of MetroLoft Management’s conversion of the former Pfizer headquarters.

The July 7 incident that triggered an emergency response to the Midtown East project has put the brakes on the developer’s progress while interest continues to accrue on its record $720 million construction loan from Madison Realty Capital.

MetroLoft founder Nathan Berman has expressed optimism that work will restart in the coming weeks on the project, which he claimed to The Real Deal was ahead of schedule when the buckled columns were discovered. But the fate of the star conversion developer’s largest project is now facing a common boogeyman for office-to-residential conversions.

“Office-to-resi is already challenging because it’s so expensive to reposition those assets, and now you add the factor of time,” said Paul Rahimian of Parkview Financial, which has lent on conversion projects. “You’re going to blow through your budget.”

The developer, which is awaiting a green light from the Department of Buildings to fully resume construction, has said only minor delays are expected in the wake of the incident. But in addition to added weeks, the project is also likely facing steeper costs than initially planned after Berman said he planned to reconstruct 15 floors after two columns were found buckled on the 21st floor.

“I don’t think any investor, lender, equity investor, or developer would tell you that their development schedules have a lot of room for significant error,” said Adam Falk of BH3 Management, which is converting 141 Willoughby Street in Downtown Brooklyn into over 200 residential units.

The pause marks a concerning snag for the project, which, until last month, was poised to be the pinnacle of Berman’s career.

Berman mastered the art of office-to-resi conversions in the Financial District, where he converted the former Goldman Sachs headquarters at 55 Broad into 571 rentals and is in the process of turning 25 Water Street into 1,300 apartments, marking the country’s largest conversion. He trained his gaze on Midtown in 2024, announcing a deal to transform Pfizer’s longtime headquarters that would mark the city’s largest conversion and the launch of a new housing submarket in the heart of Manhattan.

The property that served as the pharmaceutical giant’s headquarters for 62 years presented unique obstacles. The 1970s-era property actually consisted of two buildings, a 33-story 235 East 42nd Street, and a 10-story structure at 219 East 42nd Street.

Berman partnered with NYC’s flip king, investor David Werner, to convert the buildings into one massive luxury residential tower, totaling 1.3 million square feet with 1,600 units. Plans called for adding four floors to the taller 33-story 235 East 42nd Street, and 19 stories to the smaller 219 East 42nd Street building, with tenant move-ins expected to begin in late 2027.

The developer of a project is stuck paying on a construction loan until it secures a certificate of completion. Once that happens, the developer can switch to a permanent loan with a six to seven percent interest rate.

In a hypothetical example, Brian Steinwurtzel of GFP Real Estate told TRD in May that if a developer is borrowing $500 million with an effective rate of 10 percent, it amounts to $50 million a year in interest costs. Those interest costs continue to accrue, however, if plans change or the project is delayed.

“Time is the most expensive thing, and any of these delays around approvals or permitting or getting materials to buildings is just a killer, because you’re just stuck,” said Steinwurtzel, who is co-developing 25 Water Street with MetroLoft. “It’s like burning money just sitting around waiting.”

In the case of the Pfizer building, it took on a $720 million loan from Madison Realty.

Two sources speculated the loan’s rate is about 650 over SOFR, or about 10 percent. It is difficult to calculate the exact interest payments, however, because it is not clear how much of the loan has been drawn down, or used for construction costs.

Office-to-residential construction loans are highly project-specific, with pricing driven by factors such as the amount of structural work required and whether a building is occupied, according to a debt broker who was speaking generally.

The former Pfizer headquarters was vacant, eliminating the risk and expense of relocating tenants, though its extensive structural work likely offset some of that benefit. Based on those factors, the broker said the loan likely carries an interest rate lower than 10 percent.

“Financing for office-to-resi is very expensive because a shit ton can go wrong,” a debt broker told TRD, speaking generally.

A new test

When Berman trained his gaze on Midtown, the neighborhood had previously been a no-go zone for conversions. Historically, the math didn’t quite work because of higher occupancy rates, larger floor plates, and higher values compared to Downtown Manhattan.

But the pandemic was a turning point. Midtown office values plunged, and even as the Federal Reserve raised interest rates, Berman expected a slew of conversions in Midtown, bolstered by the city’s 467-m tax credit giving developers a 90 percent property tax break for up to 35 years if a portion of the units were built as affordable housing.

Putting it all together, a developer could make a comparable return on a conversion, if not more, than new construction, outside of a major setback in the construction timeline.

For Berman, it all comes down to a simple equation, he told Bloomberg in 2023. For the building to be sold or rented out at a profit, the purchase price plus construction costs must equate to around 60 percent of the cost of building ground-up.

Berman and Werner’s all-in costs in the development are unclear. Werner started buying the properties in 2018, partnering with Alexandria Real Estate Equities. Werner acquired the 33-story building on 235 East 42nd Street in 2018 for $228 million. Next, the partners bought the neighboring 10-story 219 East 42nd Street, both the land and building, for $142 million.

Werner bought out Alexandria’s position in 2024. That same year, MetroLoft stepped in and agreed to buy just less than 50 percent stake in the two buildings.

Werner finalized the remaining piece of the assemblage last year by acquiring the land underneath 235 East 42nd from the estate of the late Bernard Kayden for $140 million.

Berman estimated to Crain’s in 2024 that the Pfizer project will cost “hundreds of millions of dollars, but we hope to not hit $1 billion.”

The increased scrutiny also raises questions about whether the negative press and concerns over the building’s safety will affect the success of the project’s leasing activity. The new batch of units has been regarded by some developers and owners as a testing ground for asking rents and demand in a neighborhood undergoing a residential transformation.

In the long term, brokers told TRD that despite the negative headlines, New York’s severe housing shortage and the building’s planned amenities will likely outweigh short-term reputational damage.

Another unknown is how a significant delay could elicit action from the project’s lender. Madison Realty, known for writing big checks and for taking aggressive actions when borrowers default, has stayed tight-lipped and declined to comment.

Berman has emphasized that only a small portion of the project was affected by the incident, and parties attached to the project have touted confidence that the construction process could be diffused by the sheer scale of the project. The size of the conversion could work in MetroLoft’s favor, allowing construction to continue in parts of the building that are not affected by the repairs.

“This will take time to solve. It will take more money, but in the grander scheme of things, when you’re looking at a project of this magnitude, this shouldn’t have a big impact,” said Ran Eliasaf of Northwind Group, which lent $135 million million to the Pfizer building’s ground lease owner, David Werner Real Estate Investments.

Rich Bockmann contributed reporting.