Silverstein Properties and Metro Loft, two New York City developers, have partnered to purchase a Wall Street office building and will convert it into 571 apartments over the next three or four years, the firms announced.
The building, which has housed financial service and tech firms since it was opened in 1967, now stands one-third empty after the permanent shift to remote work and financial services’ firms migration to Florida, which we reported in “U.S. Financiers: Bye-Bye Wall Street” (2 Feb 2021).
The two trends have skyrocketed the city’s office vacancy rate, The Wall Street Journal reported.
Nationally, emptied office space has been converted into more than 13,000 apartments during 2020 and 2021, according to RentCafe, an online apartment search site.
The conversions are “the right evolution for these struggling, underperforming, older office assets that are approaching their obsolescence,” Metro Loft founder Nathan Berman said in comments quoted by the WSJ.
The rate of conversions is unlikely to have a noticeable impact on the soaring demand for apartments nationwide.
To make a significant difference, office rents would have to fall 25 to 50 percent below their current levels to persuade enough landlords to convert their buildings to flats or sell to residential developers, Jeffrey Havsy, who monitors the commercial real estate market for Moody’s, told the WSJ.
The conversions “will not be something that will solve our housing crisis or be such a dramatic trend that it will significantly change our cities,” he said.
That is partly because such conversions carry several challenges, as we noted in “Midtown Manhattan Still Has the COVID Blues” (29 Mar 2022) and “Plan to Turn New York’s Vacant Hotels to Housing Not Working” (5 Apr 2022).
Office buildings are designed with large, open spaces and centralized plumbing. They do little to block noise coming through walls and can leave large swaths of floorspace far from natural light.
In addition, city zoning and building codes often are barriers to such conversions, requiring developers to spend time and lawyers’ fees challenging them or winning exemptions or special permissions.
However, “there are very few obstacles we can’t overcome,” Berman said of his partnership’s plans.
TREND FORECAST: Early in the COVID War, we warned that office space would crash in articles such as “Real Estate’s Reality” (7 Jul 2020). Events have long since proven our prediction correct.
The permanent shift to remote work has left many cities with an identity crisis: they were business hubs where commuters flooded into office buildings every day and spent while in town, supporting a broad and deep retail ecosystem.
Those days are history and more office buildings will see large amounts of empty space.
TREND FORECAST: To maintain property values and tax revenues, landlords and cities will collaborate to repurpose the vacant offices.
More people have returned to cities, as we noted in “Manhattan Apartment Rentals Snap Back” (19 Jan 2021). But we forecast that snap back has peaked.
While large numbers of them have returned not because they have to be close to the office but because they see cities as rich and exciting places to live, as the economy continues to decline and crime and violence rise, the big move in will escalate to a big move out.
TRENDPOST: To meet that demand for experiences, city governments will ease zoning ordinances and building codes to allow offices to be used not only as apartments, but also as yoga studios, music academies, coffee houses, adult education centers, and other service-oriented enterprises.
Not all empty office space can or will be saved and the process of repurposing the vacancies will be slow and bumpy.