Many cities across the United States are faced with two enduring impacts of the COVID-19 pandemic: vacant office space in their central business districts and a high demand for housing. Many cities across the country, including New York City, San Francisco, Boston, and Atlanta, have adopted or are considering policies to encourage the conversion of offices to residential buildings in their commercial districts.
ESI recently supported New York City’s Office Adaptive Reuse Task Force in developing a report that included a set of recommendations tailored to New York’s unique situation. Here are four lessons we learned from that work that may help you consider whether or not your city should adopt a policy to encourage office conversions.
Know your regulations
There are dozens of hurdles that will prevent an office building from being converted to a residential property—physical design, financing, risk, market conditions, future expectations—but none of them matter if existing land use regulations or building codes don’t allow conversions. Municipal zoning regulations are most likely to affect conversions, but state-level building, health, or safety regulations may also limit the ability of property owners to convert their buildings.
In New York City, there are large sections of Manhattan in which office conversions are either illegal or must meet a series of requirements that make conversions all but impossible. In other parts of Manhattan, office buildings built before 1979 may convert under a set of more lenient regulations than buildings in other areas. The Office Conversion Task Force made several recommendations to harmonize and loosen regulations governing conversions.
Vacancy rates will not dictate conversions
Owners will. When we first started looking at the New York City office market and talking with industry experts, it became clear that there was a subset of buildings in the office market that stood little to no chance of attracting new tenants in a post-COVID landscape. We heard over and over about a sustained “flight to quality,” in which tenants were signing leases for smaller floor area in more amenity rich buildings closer to major transportation hubs.
Landlords with high quality space in desirable locations were happy to oblige the shift, leaving landlords with lower-quality space in secondary locations with excess space. We saw buildings that were 30, 40 and sometimes more than 50 percent vacant with little immediate hope of attracting new tenants. What perfect conversion candidates!
However, most of these buildings are unlikely to convert. Why? Most property owners don’t have the experience to convert a building from one use to another. The risks of trying were too great. Many property owners aren’t willing to sell the building at a loss and would rather wait and see if the market returns. Or they had such favorable terms on loans signed before the pandemic that selling and buying back into the market at higher interest rates made little long-term sense.
Some buildings are more suitable to conversion than others, but most physical constraints can be overcome if someone is willing to pay
The office stock in any given city is a historical record of building materials, techniques, styles, preferences, and space requirements. In New York City, most successful office-to-residential conversions had three common characteristics: they were built before 1940 and had comparatively small floor plates and operable windows. In the 1950s and 60s, businesses demanded open floor plans and innovations in building technologies allowed for ever larger floorplates that continued to expand in subsequent decades.
Modern buildings do present a series of physical design challenges than older buildings, but architects are clever. In conversations with several designers with experience converting offices to residential buildings in New York City, it was clear that there is a design solution to nearly every physical challenge an office building can present. Curtain walls can be replaced to create windows that can open and close. Elevator banks can be moved or removed. Stairs can be installed. Cores can be cut out of the center of a building with large floorplates to allow air and light to reach the interior. Additional floors can be built on top of a building with structural reinforcement. But with every major shift in a building’s design, the costs of conversion goes up, and as those costs go up, property owners and developers will be looking to city governments for incentives.
Office-to-residential conversion is a niche practice, which means financing can be a challenge
Developers in the real estate industry tend to specialize in one building type, for example, high end commercial, low-income housing, large-format retail, or entertainment complexes. This specialization allows developers to deliver buildings with greater efficiency and lower costs. However, most practitioners don’t have experience converting one building type to another, and without a strong track record of success in a given market, lenders may be unwilling to finance conversions.
Office to residential conversions make good urban planning sense. With the right zoning regulations, tax incentives, and financing options, office-to-residential conversions can help meet the demand for housing, help remove excess vacancy from office markets, and bring more foot traffic to neighborhoods that have been struggling since the pandemic began three years ago. However, unless heavily incentivized, office conversions are likely to remain relatively uncommon.
David Stanek, Ph.D., a director at ESI, is an urban planner who specializes in combining data science techniques, geographic information systems, and qualitative research methods to evaluate the role and influence of land use and preservation interventions on residents, places, and municipal budgets. Prior to joining the firm, he was a land use and zoning researcher at the Penn Institute for Urban Research. He has taught land use, urban policy, and public finance at Rutgers University and Hunter College and has consulted on projects for a variety of clients including the World Monuments Fund, Arup, the William Penn Foundation, Ford Foundation, USAID, the Urban Institute, and WSP as well as several municipal governments.