A new trend has been picking up steam in New York City: office-to-residential conversions. John Vavas, partner at law firm Polinselli's Real Estate practice in New York, has been active in this area representing lenders in these types of deals.
In the last six months, he estimates that he's helped close four or five transitions that involve transforming an office asset into residential use.
In one he represented Northwind Group in its recent $135 million loan to a joint venture between David Werner Real Estate Investments and Nathan Berman's Metro Loft to convert a portion of Pfizer's former headquarters at 235 East 42nd Street. The same JV was given a $75 million loan from Northwind for the other part of Pfizer's former headquarters over the summer. Collectively, both vacant office properties will be converted into 1,600 multifamily units, which is being called the "largest office to residential conversion in NYC history," according to Northwind.
"There's some form of residential office to residential conversion taking place, whether it be for the entire building, whether it be for a re-stack of the building, moving commercial tenants around within the building to then free up contiguous floor space through a different elevator bank and convert that portion of the building to Resi," Vavas said.
Sarah Hawkins, CEO of East Region for Hines recently noted at a real estate outlook 2025 panel at NYU Stern School of Business that five million square feet of office-to-residential transformations were underway. While it might seem ambitious, she added that potentially 17 million square feet could get converted assuming everything in the planning stages goes well. But there is clearly momentum picking up on this trend in NYC.
NEW LAW ONLY HELPS
Vavas also noted that the City of Yes legislation that the New York City Council passed in December helps with the office-to-residential movement, allowing the increase of zoning and change zoning use.
"This is driving this uptick in residential units, and I think the city could use them. I think that there's always a demand for housing," Vavas said.
TYPES OF BUILDINGS TO CONVERT
Office demand has been recovering since the slowdown from the pandemic, as tenants now seek highly amenitized properties. Class A and Trophy assets come to mind. While it's not to say it won't happen, the goal is to keep these kinds of assets where they are in office. On the other hand, more vacant and lower-tier properties like Class B and Class C are more likely to undergo a residential conversion, according to Vavas.
But for developers to convert an office asset into a residential asset, it needs to be the right building, Vavas stressed. He noted the layouts of residential and office properties are different. To get the most out of the conversion, developers need to find the correct amount of light and air within a building, according to Vavas.
This is so "you're not worried about coring out the center, or having an inefficient layout on each floor because zoning and code require bedrooms to have windows [with a] certain amount of light available to each of the units," he emphasized.
LIKELY OPPOSITE RENT TRENDS
While housing is a big need in NYC, in particular, there is one caveat: multifamily landlords will likely see a "slowdown" in rent growth, Vavas warned. This is because the availability rate will be driven up.
However, the opposite is true for office. Converting more of these assets will drive the availability for the category down and likely lead to more rent growth. That's something most in the office space would welcome, especially since the asset class is still significantly less of a need today compared with housing.
Converting office properties into residential assets is only likely to continue. But overall, Vavas said that lending has started to pick back up across the board — and not just on this trend.
"Deals seem to be getting done, and I do see an increase in volume," he concluded.