Turning Offices into Bedrooms
Sleep where you used to work.
Four years later, the effects of the COVID-19 pandemic continue to ripple through out the nation. We see this in the housing market, where extraordinary prices and mortgage rates are causing a stalemate in the market. We feel it in our downtowns, where storefronts are still boarded up and retail hasn’t bounced back. We experience this in our work, where our homes have become our offices.
Remote work, hybrid models, and and population movement have gravely effected the commercial sector. Vacancy rate for commercial space is at an astounding 20%. As employees continue to work from home or refuse employer’s return-to-office pleas, traditional office space is taking a huge hit. Not all of the commercial sector is taking a hit. While traditional Class A HQ’s are suffering, flexible work environments are thriving. The U.S. co-working sector grew by another 7% at the end of Q2.
The huge talk of the town is commercial to residential conversions. But this isn’t new. When the recession of the early 1990s hit the nation, the demand for commercial real estate (CRE) plummeted right after reaching an all time high of development in the 1980s. While the 1990 recession and the post-COVID world are different in many ways, there are some lessons learned that we can apply to today’s lull in the CRE market.
Enter 421-g.
New York State enacted 421-g, which was a property tax incentive to encourage lower Manhattan property owners to convert office buildings to residential use. The government made several exceptions to zoning laws and handed out tax breaks to get projects going. The result? A whopping 13% or +13mil SF converted to resi between 1995-2006. That’s huge. (Side note: I actually lived in one of these buildings in the Financial District when I first moved to NYC!)
Today’s equivalent is New York City Office Conversion Accelerator. The rise in office vacancy paired with the housing shortage make this pretty timely. At present, 60 buildings are in the program, however, only a handful of conversions have actually begun. This is in large part due to ongoing state vs. city misalignments and zoning laws.
A few other points about the architecture:
Commercial to resi conversion is not a one-size-fits-all, and not all buildings are suitable for conversions. Based on the work in the 1990s, pre-war buildings made better candidates than newer builds. Older buildings have smaller footprints, less zoning restrictions, and didn’t cost as much to convert.
Newer buildings have much larger footprints, which means there is a lack of natural light in the middle of the floor plate. Cutting a courtyard out of the building is expensive and engineering intensive.
Sometimes the economics of converting newer builds don’t math out. And if they do, then the residential units are more likely than not to be market rate luxury rentals, like at 25 Water Street.
It seems that NYC is taking a page out of the 1990s recession playbook. Only time will tell if the conversions help or further hurt the housing market situation.
there's a lot of...home work to be done