Converting an office into a multifamily property is no easy task. There are countless real estate brokers out there today trying to sell this idea as a solution to their clients as a once-in-a-lifetime opportunity. And it’s tough to blame them. Transactions are down materially; most investors hear the phrase “Office Real Estate” and immediately hide their wallet. It’s a tough slog, and there’s nothing about the current situation that feels like a normal part of the cycle. Cost, of course, is the biggest obstacle, but regulatory issues including zoning are huge issues as well.
With this in mind, New York City’s City Hall, Department of City Planning, Department of Buildings, Department of Housing Preservation & Development, Board of Standards & Appeals, and the Landmarks Preservation Commission are getting together to smooth the process. That’s right, if someone wants to convert an office into multifamily, they need to get approvals from no fewer than 6 agencies. New York is a unique place; there is no doubt that multifamily and office are more integrated in that city than nearly any other. However, being required to file paperwork with uncertain outcomes to 6 different agencies is beyond absurd.
Some folks may not remember, but as we emerged from the global financial crisis, there were quite a few office conversions that took place. And New York saw more of them than anyone else. So, this pain has been around for a long time. But we also find ourselves asking the question, do any of these agencies have any idea what it will cost for buildings in NYC to be converted? In the last 5 years, some of the biggest changes have been:
- Steel mill products: up 103.6%
- Lumber and plywood: up 97.1%
- Concrete products: up 55.5%
- Asphalt: up 48.7%
These are not trivial moves, and they say nothing about what rents will be available to proposed tenants. On some level, we applaud NYC for trying to eliminate some of the red tape. The problem of empty office towers and low tax collection could hit that city very hard. But we also wonder if this theoretic collaboration will be enough to help developers and investors over the cost/benefit hurdles.