For many New Yorkers, Midtown Manhattan, with its gleaming skyscrapers and busy transportation hubs, lacks an element of cool and cachet that its more culturally vibrant neighbors have. Hordes of office workers, commuters and tourists typically flood the area, leaving it feeling anything but residential.
What Midtown does have, though, is a glut of underutilized office buildings. Two in particular brought Nathan Berman, chief executive of Metro Loft, to the area: the hulking buildings of Pfizer’s former headquarters on East 42nd Street near Grand Central Terminal. Metro Loft, along with David Werner Real Estate, is converting the buildings into about 1,600 rental apartments.
Once completed, the project would be the largest office-to-apartment conversion nationwide, Mr. Berman said. The first tenants are expected to move in at the end of next year.
The developers also recently bought an office building around the corner from the Pfizer site to create roughly 450 residences, 25 percent of which will be affordable housing.
“We go where there is opportunity to convert what we believe to be undervalued assets, and we can do that anywhere in Manhattan,” Mr. Berman added. “Right now, Midtown seems to be presenting the most opportunities for us.”
Mr. Berman has spent over two decades converting office buildings in the financial district, but the Pfizer project is his first in Midtown. He believes that future tenants, whom he calls “active younger professionals,” will forgo more traditional neighborhoods like Greenwich Village, Chelsea or the Upper East Side, with their charming cafes and green spaces, for splashy building amenities like a gym, a rooftop pool, lounges, co-working spaces, and a washer and dryer in each apartment.
“No one even needs a grocery store anymore, since everything gets delivered,” Mr. Berman said.
In addition, he said, as more companies order employees back to their desks, he hopes more people will want to live closer to the office, even if they have to be on site only part of the week. People “want to walk or bike or even scooter to their offices,” he said.
Arpit Gupta, an associate professor of finance at New York University’s Stern School of Business, said the proximity to thousands of workplaces was one of Midtown’s selling points. And once people move in, it’ll help the neighborhood: More tenants will eventually attract “the construction of retail, food and beverage industries, which serve to attract other renters in a positive cycle,” she said.
Metro Loft was one of the first to transform moribund office buildings in the financial district into apartments. Mr. Berman’s first big project downtown, at 17 John Street, was converted in 1998. Since then, he has converted 15 buildings in the financial district, with four more in development and others in the pipeline.
In cities across the country, more office buildings have been turned into housing, as officials clamor to solve for the mismatch between a surfeit of outdated office buildings and a lack of housing.
This year, nearly 71,000 residences have either been approved, remain under construction or are in the planning phase, which is more than triple the number from three years ago, according to a February report from RentCafe. New York, which is the country’s largest office market, has over 8,300 offices set to be converted into apartments this year.
In other cities, developers often opt for areas with a mix of commercial and residential properties. Michael Pestronk, the chief executive of the development company Post Brothers, prefers converting office buildings into apartments in neighborhoods already replete with housing, he said. But his Philadelphia-based firm — which, according to its website, has worked on more than 30 properties — recently started work on converting buildings in Washington, D.C.
“We’ve certainly done developments in tertiary neighborhoods, but with the number of opportunities we’re seeing today, we feel like we don’t need to be in pioneering locations,” Mr. Pestronk said, referring to areas not considered traditionally residential. “Instead, we’re focused on main locations that are very obvious in terms of the demand.”
Many developers have been keen to convert office buildings as more properties sell at a discount, many of them in central business districts that for years have suffered from empty buildings and streets.
“From 2012 to 2019, these buildings that we’re converting were trading — even if they were basically obsolete — for $400 to $500 per square foot, and now they’re $100 to $200 a square foot,” Mr. Pestronk said.
Adapting older commercial properties can also be less costly than building new housing. Research from CBRE, a real estate firm, estimates the cost of conversion to be $100 to $500 or more per square foot, depending on the original layout. Those costs are still as much as 20 percent less than building something new because the edifice is retained, Mr. Pestronk said.
The biggest cost differential, he said, is from the time saved. Construction on a conversion can be completed as much as one year faster than building something from the ground up.
“The speed to market is worth almost as much as the savings from reusing the structure,” he added.
Commercial structures also have thicker floor slabs, built to accommodate heavy equipment, making them ideal for reducing noise in closer living arrangements.
But not all empty or outdated buildings can be converted. Estimates vary, but a Moody’s Analytics study from 2023 of New York offices found that only 3 percent were suitable for transformation. A study for the Brookings Institution suggested that 9 to 11 percent of buildings nationwide could be converted, a statistic that translates into about 2,500 buildings.
The difficulty in turning office buildings into apartments is that they are laid out differently. Office buildings, for example, may not have windows that open or have too much space from wall to wall.
Buildings that are converted are usually gutted and reimagined. The old Pfizer buildings have floors that are roughly 200 feet deep, and Mr. Berman will have to divide the space to meet light and air regulations, such as the requirement that each apartment has a minimum distance between an operable window and building walls.
Mr. Berman has had experience doing this. Most recently, he did it at 25 Water Street in New York’s financial district, which had a depth almost as large as Pfizer’s old offices. The solution: Create two atriums so that more windows can be added to apartments. The plan is to do the same at the Pfizer buildings.
Then there are complex zoning restrictions and higher interest rates, and even experienced developers like Mr. Berman could run into unexpected expenses that put a project at risk. Not to mention potential tariffs, which are a wild card that will affect the price of materials needed for new construction as well as conversions.
Post Brothers recently faced foreclosure at one of its buildings in Washington, and Metro Loft encountered financial problems because of rising interest rates at two properties, even though both were more than 90 percent occupied.
“If you’re highly leveraged and your rate doubles, it will put you in a tough situation,” a spokesperson for Metro Loft said.
As for whether young people will happily move to the bustle of Midtown: If the past is any indication, it’s possible. It happened in both the financial district and Hudson Yards, the mixed-use area on the western edge of Manhattan where Pfizer has relocated. Mr. Berman hopes to replicate the success in Midtown.
He said, “Shaking and transforming buildings in the middle of what is an office area takes an empty office building off the market and brings in residential and that will invigorate an area.”
Source: nytimes.com
