From Desks to Doors: The Rise of Office-to-Residential Conversions in NYC
Nicholas Ritacco of IB Global on how the city's real estate landscape is adapting to meet the evolving needs of both residents and businesses.
As companies continue to adjust their office footprints, there’s a growing opportunity to repurpose vacant buildings into apartments. In New York City, for example, office-to-residential conversions are bubbling, largely driven by the change in work patterns.
However, transforming office space into housing is easier said than done. Industry experts caution that these conversions can be very complex, costly and often slow. Each project requires careful consideration of location, zoning regulations and building layout to ensure that the resulting residential spaces meet New Yorkers’ needs. Yet, despite the multiple challenges, the potential benefits are promising. Conversions can revitalize underutilized urban areas, contribute to more sustainable urban environments and offer new housing options, sometimes even at more affordable prices.
Class B and C office assets are most likely to be repurposed, while premium Class A spaces remain in use, according to Nicholas Ritacco, director of finance at IB Global, a New York-based asset management company. In this interview, Ritacco shares insights on office-to-residential conversions, touching on their potential impact on the city’s real estate landscape.
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How fast has this trend spread so far?
Ritacco: Many companies are still in the process of not only rightsizing the amount of office space they need but also just getting their employees to return to the office in general. Part of getting employees back into the office will be creating a great environment to return to and that will remain Class A office space, leaving the rest, in our opinion, best to be converted sooner rather than later.
Do you think this is a temporary response to current market conditions or a longer-term shift?
Ritacco: This is definitely a longer-term shift. We are in the very early stages of the process. The office is just getting to its bottom in our opinion, price discovery is continuing to this day and really the understanding of the future demand of the office isn’t clear just yet. What is clear is that there’s residential demand as average rents have continued to increase year over year.
What could be the potential long-term benefits of converting commercial spaces into housing?
Ritacco: This has been and will continue to be a slow-moving process. These are large and most often very involved conversion projects, and with that being said, we don’t expect to see a big impact in the near term. With a longer-term focus, depending on the local market, we would expect to see these conversions help revitalize areas.
Do you think transforming commercial buildings into residential units could indeed be a solution to NYC’s housing shortage, at least partially?
Ritacco: The NYC market, in particular, is so large and efficient in our view that, while office conversions will definitely help the housing shortage issue, the overall impact will be relatively minimal. Local zoning changes combined with a more affordable rate environment will be much larger contributions to the solutions around housing. The contributions from office conversions will not be felt in the market for several more years.
How will these office conversions impact property values—both residential and commercial properties in the city?
Ritacco: Office conversions generally will trade at a slight discount to other residential properties in the neighborhoods, definitely geared toward the more value-hunter homebuyers. While the residential market is generally more homogeneous and hyper-sensitive to rates, the commercial market is more differentiated by its end-use case. The office remains a troubled asset class continuing to find fair value in respect to pricing, while retail and industrial are in much stronger positions.
Tell us more about the biggest challenges you need to overcome to convert office spaces into residential units.
Ritacco: Location and layout are at the top of our list when evaluating a potential office conversion. If the location doesn’t have a supportive local environment for a residential community, it will be very difficult to get people to move. In our opinion, basic ingredients will include proximity to transportation, a good mix of restaurants, retail and at least one grocery store.
Layout is next on our list, as the layout of the units will help determine exit value and rental value. A good layout allows us to carve out units with minimal wasted space. These efficiencies help the bottom line and quality light exposure is very important.
Even with a great location and efficient unit layout, nothing will get done without zoning in your favor. Every site is different. Some sites are easier than others, but most often all conversions will require a change of use which, depending on the project, can be a lengthy timeline to get completed—sometimes longer than the construction work itself may take.
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What are the environmental implications or opportunities of converting office buildings into residential units?
Ritacco: Our firm believes there are many positives with respect to the environment and sustainability implications of these conversions. Simply turning these unoccupied offices into occupied residences helps revitalize areas with minimal impact on the environment. While the interiors get new material, the main shell of the building remains, keeping materials out of landfills and prolonging the life of the overall structure.
Often throughout the process, especially for Class B and C buildings, the energy infrastructure is upgraded along the way, creating a more energy-efficient building. We believe in the long term, as more and more offices get converted, there will be a push for more energy-efficient urban spaces as the local communities where these projects are being developed are turned into more mixed-use areas.
What opportunities and risks should investors be mindful of when considering office-to-residential conversions?
Ritacco: Our firm is actively looking into office opportunities. From a long-term point of view, the asset class is very attractive. While affordability remains an issue in the residential market, that will change over time as the Federal Reserve continues to cut rates, and that will only serve as a benefit for new residential inventory coming into the market.
These conversion projects are both time- and capital-intensive, so a strong management team is required to execute effectively. Investors should be mindful of the submarket they’re in. So not every office deal, independent of how “cheap” it may be, will result in a conversion project where people will want to live. Location, layout, patience and execution will be keys to a profitable investment in an office conversion.
How should developers and investors balance the risk of a potential future where companies return to full-time office work? Could New York City face a shortage of commercial office space in the coming years if too many buildings are repurposed?
Ritacco: We believe that while return to office is on the rise, work from home is still here to stay. How people work and commute has forever changed. The balance between working in the office and at home will definitely continue to change, but companies will work through rightsizing their office footprints, and this happens over several years.
A shortage of office space will not happen in the short term, and what the office will look like will most likely be much different than the offices of today. When we talk about office conversions, we stick to the Class B and C office spaces, which have a much different demand profile than Class A office space. We expect this trend to continue. The supply and demand imbalances that we see today will work their way through the marketplace, and new office spaces will continue to meet the market demands.
