The pandemic-driven rise in remote work has created a big opportunity for real estate developers to turn empty offices into apartments, condos, and other types of housing.
Office conversion projects are on the rise across the US and gaining support from many city leaders. New York City Mayor Eric Adams, for instance, launched the Office Conversion Accelerator program last summer to help expedite the typically lengthy conversion process.
Despite their potential, office conversions face challenges, stemming from differences in design, regulatory requirements, and purpose between offices and residential buildings. For example, zoning laws sometimes forbid residential use in areas traditionally designated for commercial or office purposes.
Brian Steinwurtzel, co-CEO and principal of GFP Real Estate, understands how to navigate these challenges. His firm, which is New York City’s largest landlord for small and medium-size businesses, is working to convert an office building at 25 Water Street in Manhattan’s financial district into 1,300 residential units. Steinwurtzel spoke at Goodwin’s RECM conference about what he looks for in this type of project.
These are Steinwurtzel’s three “must haves” for successful office conversion projects:
#1: The Development Must Conform With Existing Zoning Codes
Steinwurtzel emphasized that the development must be “as of right,” or comply with all zoning codes without the need for special permissions, such as entitlements or zoning variances, from the New York City government.
“We will not look at a project that requires entitlements,” Steinwurtzel said. “It is just too difficult.”
Steinwurtzel’s zoning analysis includes confirming that the office building is in an area that permits residential construction. In Manhattan, certain manufacturing zones, including parts of Chelsea and the Garment District, restrict residential building, Steinwurtzel noted.
Steinwurtzel seeks out zones in which entire office buildings are eligible for conversion into residential buildings. In Manhattan, this generally includes offices built before 1977 or 1961, with the cutoff year dependent on the building’s specific location.
#2: The Office Building Must Have a Path to Vacancy
Most office buildings are not entirely vacant, and landlords typically stagger lease expirations, posing challenges to conversions, Steinwurtzel said.
Still, converting some parts of an office building for residential use is possible, he said. The specific rules regarding how a building’s space can be converted around existing tenants depend on the building’s age and its location within New York City.
“We’re looking for buildings that are either on their way to being empty or have blocks of space that are available,” Steinwurtzel said. “We can convert those blocks, and then the rest of the building we can decide about later.”
#3: The Expected Returns on Conversions Must Justify Their Greater Risk
Conversion projects are much costlier than ground-up construction projects, with high levels of debt and closing costs. Office buildings and apartments have drastically different layouts that also make conversions complex, increasing the potential for delays and unexpected expenses.
Steinwurtzel offered some guidelines for identifying economically viable projects. The conversion project should generate a yield on cost of at least 7%, and the internal rate of return — a key estimate of profitability — should be at least 20% to 25%, he said.
Developers should try to buy the property for as little as possible by seeking lower land values, seller financing, or seller equity contributions. Working with an experienced development team that understands the intricacies of conversion projects can be crucial to a project’s success, he said.
This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.