Kramer Levin Hosts Program of Real Estate Heavyweights To Discuss Challenges and Priorities for NYC Office-To-Residential Conversions

Kramer Levin convened a room of real estate heavy hitters for their “The Conversion of Office to Residential: Defining NYC’s Future” event at the Kramer Levin Multimedia Conference Center in NYC on April 9.

Dan Berman, Partner, Real Estate, Kramer Levin opened the event by emphasizing the urgency of the subject at hand. Berman explained that while office recovery may be underway for elite Class A properties, finding new uses for vacant Class B and C properties and solutions for historically low housing vacancies is more critical than ever.

Proposed City of Yes for Housing Opportunity Zoning Changes To Remove Key Barriers to Conversions

The City of Yes for Housing Opportunity zoning proposal was detailed in a conversation moderated by Elise Wagner, Co-chair of Land Use at Kramer Levin, and joined by Dan Garodnick, Director of the NYC Department of City Planning, and Suri Kasirer, President of Kasirer.

Wagner started by summarizing the status of the three City of Yes zoning amendments that are being proposed by the Department of City Planning.

Garodnick explained that the third proposal from City of Yes for Housing Opportunity would eliminate two of the biggest obstacles to office-to-residential conversions: the date of eligibility and geographic limitations. By updating the date of eligibility for a building from 1961 to 1990 and removing geographic barriers, the number of properties eligible for conversion will drastically increase. He also shared that the city is working to create more robust 24/7 neighborhoods that include high-density residential but also allow existing uses to remain.

Kasirer added that there is a clear commitment to housing development at both the city and state levels, but that legislation must pass to incentivize conversions and make executing these projects more feasible. Kasirer pointed to four legislative proposals being negotiated: a new 421-a affordable housing subsidy program, an extension of the construction completion deadline for projects under the old 421-a program, a conversion incentive program and lifting of the 12 FAR (Floor Area Ratio) cap.

Despite work being done by the city and state to alleviate legislative and regulatory hurdles, the primary challenge for the private sector is finding a way to make the numbers work.

For the Private Sector, It Comes Down to Incentives and Economics

During a panel discussion moderated by Jay Neveloff, Chair, Real Estate, Kramer Levin, who was joined by Marty Burger, Principal, Infinity Global; Kenneth Horn, Founder & President, Alchemy; Darcy Stacom, Founder & CEO, Stacom CRE; and Robert Knakal, Chairman & CEO, BK Real Estate Advisors, speakers laid out the complexities of financing conversion projects.

Neveloff opened the private-sector discussion by asking why, with a crying need for affordable housing, workforce housing, and middle-class housing, and urgency in stopping the outflow of people from New York, we aren’t seeing more conversions.

“Office buildings are out of favor. There is a huge need for housing in NYC, and there is an excellent talent pool, so the question is, ‘Why aren’t we doing more conversions?’ And the answer is it’s not easy,” said Burger. “You may have tenants still in the building or floor plates that aren’t easy to work with. Add to that the zoning, and there’s no economic incentive or tax abatement.”

Horn stated that “the deals have to make sense economically. If you’re going in, interest rates aren’t helping. What’s going to generate interest from funds and LPs is sound returns. We need a confluence of government and tax incentives, interest rates going down, developers going in at cap rates that are less advantageous at first but with the understanding that once the building is seasoned, returns will go up.”

Stacom added that it’s “all about the capital stack and who are the limited partners who are going to get this done. They’re looking at the space and saying, ‘Show me how to make the numbers work,’ and without incentive to make it work, we’re not going to see a large number of conversions.”

Owners and developers also face considerable risk when undertaking conversion projects. “The reality is that there has been an impairment of value. Some buildings are 60% or 80% vacant, but they’re not 100% vacant, and if there’s a term on that lease, it becomes a huge expense to be added to the overall cost,” Knakal said.

Burger elaborated on the point, stating that renovations can offer a cost savings over new construction but that “with any rehab there are always going to be unknowns, but the other positive is that you can be up and running between 18-24 months, versus a ground-up could be anywhere between 4-8 years. So there are a lot of positive attributes to getting it done, if and when it works.”

Despite Challenges, Optimism Remains Along With a United Desire To Make the Case for Conversions

Despite the challenges outlined throughout the program, the event closed with a sense of optimism and belief that the scaling of conversions in NYC is possible, if the right policies and incentives are in place. What’s more, the panelists shared that there’s a desire by the real estate community to solve the city’s housing crisis.

On the legislative front, Kasirer attributed a recent shift in winds to support policies that would make conversions more feasible to leadership across both the public and private sectors. “We have a Governor and Mayor who are both incredibly supportive of housing, a Senate Majority Leader, Assembly Speaker and Council Speaker who are supportive of housing, and more and more city and state lawmakers coming out in support of new housing. REBNY and the real estate industry have done a good job expanding the number of supporters for housing and development, and labor unions are fearlessly committed to making something happen on housing this session, and while there’s a disagreement of the specifics of the new 421-a program, the building trades stand ready to get their members back to work.”

Garodnick in return shared his gratitude to real estate professionals for their support of the city. He encouraged the real estate professionals in the room to support the City of Yes zoning proposals. “We’re thankful to businesses in NYC. We thank you for taking risks, and innovating and doubling down on NYC. We’re in this together.”