Big Office-to-Resi Conversion Debuts in Manhattan. What’s the Potential for More?

In partnership with Silverstein Properties, NYC development firm Metro Loft has opened 55 Broad, a new 36-story, 571-unit luxury rental property—the first office-to-residential adaptation to achieve LEED certification, according to the firms.

Formerly a financial district tower, 55 Broad includes a 25,000-square-foot amenity collection that spans indoors and out and is anchored by a rooftop pool—a rarity Downtown.

CetraRuddy served as the project’s architect and interior design firm, drawing the outside in and imbuing most apartments with views of the river, Statue of Liberty and Downtown Manhattan. Compass Development Marketing Group is the exclusive leasing and marketing partner.

This isn’t the first conversion project Metro Loft has embarked upon. Earlier this month the company secured financing for another major office-to-residential conversion in Manhattan. A former corporate headquarters will be combined with an adjacent Midtown building to create another Class A luxury apartment building.

Recent commercial real estate industry challenges have compelled many owners and developers to find inventive solutions to move projects like these forward. Michael Doty, senior director of originations, Nuveen Green Capital, told Multi-Housing News that this phenomenon parallels an increased focus on sustainability.

“This has led many to seek out green financing mechanisms, such as C-PACE, to fund sustainability measures in their reimagined urban properties,” Doty said. “This enables them to increase their properties’ energy efficiency and return on investment.”

Intention verses execution

Countless books and articles have been published about the lack of affordable residential housing as well as the change in commercial building space brought about by the pandemic, Doug Ressler, manager, business intelligence, Yardi Matrix, told MHN.

“Often, these concepts can be supported in the abstract, but opposition occurs when they are applied at a personal level,” Ressler said. “Communities nationwide seek creative ways to reuse vacant, outdated or underutilized real estate—including offices, hotels, manufacturing sites, warehouses, department stores and terminals. However, the fiducial problem is how to provide reimagining ‘space conversion’ of economic feasibility for the owner/developer at a property level and at an affordable usage rate at the consumer level.”

Ressler said the endgame usually includes much-needed housing and economic boosts, which are lifelines for post-pandemic urban cores. While the achievements are great, the path to them can be filled with obstacles. Many developmental challenges stand in the way of these office-to-residential projects.

Construction difficulties

Michelle Landers, executive director of ULI Boston/New England, told MHN that the construction challenges for office-to-residential conversions are similar to the design and engineering difficulties that these projects often face.

“With a conversion, it’s likely that structural elements, like mechanical systems, will require movement,” Landers said. “There’s also likely an increased need for substantial structural changes, including, for example, additional plumbing.”

Each unit typically needs plumbing for at least a kitchen and bathroom, if not for additional bathrooms too. But commercial spaces can sometimes be equipped with just one for a shared bathroom and kitchen on each floor.

“Legal requirements and building codes for residences also prove challenging for construction teams—with the necessity for sprinkler systems, closets, windows and egresses all posing a potential challenge dependent on the office’s floorplate,” Landers said.

Approvals that pose economical barriers

Jeff Holzmann, chief operating officer, RREAF Holdings, said that securing the necessary zoning and building approvals from the local city and state can be challenging in the condo-conversion process.

“This seemingly straightforward task can be time-consuming and costly, particularly if neighboring parties contest the developer’s plans,” he told MHN. “In some instances, especially with older buildings, the residential regulations may differ significantly, potentially necessitating a complete demolition and rebuild. Notable examples include fire and elevator density requirements.”

Another element to consider is the differing requirements for residential units versus office space when it comes to windows and emergency egresses.

“Think of all those large offices you see on television, with infinite open-space cubicles,” Holzmann said. “You can’t simply convert that into apartments since each unit must access an exterior wall and a window. This causes you to have fewer, very ‘deep’ units or the need to completely redo the exterior of the building, rendering the conversion uneconomical.”

Drawing potential residents to the area

Another crucial aspect is understanding the local demand.

“Not everyone is interested in living in an office area,” Holzmann said. “If the location of your conversion target is in a purely office-centric area, it might be challenging to attract potential buyers or renters, even with the correct zoning rights.”

Most residents prefer areas with access to amenities like food, markets, bars and schools, Holzmann pointed out. Some of these challenges can be mitigated over time, but a neighborhood environment isn’t usually in the developer’s control. These decisions come with a price tag.

“While it’s true that these challenges can be overcome with the right resources, it’s also crucial to consider the potential financial risks,” he said. “Proper underwriting and cost estimation are key in determining whether the revenue will justify the investment or if the project could turn into a costly mistake.”

Utilities make for a difficult reconfiguration

Alan Baron, enterprise consulting manager, RealFoundations, told MHN that converting vacant office properties into residential properties is conceptually appealing but can be more costly when the infrastructure must be retrofitted to meet the requirements of a residential dwelling. Afterall, office spaces aren’t configured like apartments.

“There’s typically a limited kitchen and a central location for the bathrooms in an office building, so converting the plumbing to a residential structure is required,” Baron noted. “Electrical mapping also poses a significant obstacle in the re-design because each unit needs adequate power and the ability to be individually metered. In some cases, reconstructing might even require gutting the building to its exterior shell.”

And to further complicate things, Baron pointed out the challenges brought about by the structural modifications needed to meet building codes. Specific jurisdictions as well as the age of the building are important factors in determining what modifications are necessary.

“Despite the challenges of converting office space to residential units, landlords, developers and investors have opportunities,” Baron said. “The key to this is execution. While office conversions can be expensive, exploring available credits and incentives—particularly in cities with greater office vacancies—can help alleviate costly renovations.”

Elevators pose challenges

Tom Amos, project executive, Hoar Construction, said that while office-to-apartment conversion projects can be cost-effective alternatives to new construction, particular renovations can be more complex and costly than others, thus rendering them unfeasible.

“Many former office building elevators are too small for the needs of an apartment building and thus would require expensive structural renovations to enlarge the elevator shafts,” Amos said. “Additionally, office buildings often do not have enough windows to provide natural light and ventilation to each apartment unit.”

Determining if a property is a good fit for a conversion can come down to individual components. There have to be enough salvageable elements of the original structure to make the investment feasible, Amos said.