How the Office-to-Residential Shift is Reshaping Urban Landscapes and Addressing Housing Needs
The COVID-19 pandemic redefines how we work and live, and its lasting impact on real estate is unfolding in real time. In his presentation at the 2024 1RealEstateWorld Global Conference, Massimo F. D'Angelo, Partner and Co-Chair of the Real Estate Industry Group at Blank Rome LLP, analyzes a transformative trend reshaping urban landscapes: the shift from office buildings to residential spaces. His talk, titled "Strategic Urban Rebirth: The Office-to-Residential Shift and Its Profound Impact on Real Estate Dynamics," frames this movement as a key driver in the future of metropolitan centers like New York City.
The Pandemic’s Enduring Legacy: Remote Work and Empty Offices
The pandemic causes a radical shift in how businesses operate, with many adopting permanent remote work models. D'Angelo explains that the pandemic’s effect on commercial real estate is immediate and severe, with office occupancy rates dropping to unprecedented levels. "Occupancy in commercial office buildings is hovering between 40% and 50%, even today," he states. Despite efforts to bring employees back, remote work solidifies its presence across industries. This shift drastically impacts the commercial real estate sector, leaving office buildings underutilized and their values significantly diminished.
The pandemic accelerates the rethinking of urban space usage. As companies recalibrate their need for physical office space, real estate developers and investors look for ways to repurpose vacant buildings, particularly for residential use. Once an unimaginable solution, converting office buildings into residential apartments now emerges as a practical response to both underutilized commercial real estate and the growing housing shortages in major cities.
Economic Fallout: Declining Equity and Rising Defaults
D'Angelo highlights the financial implications of this shift. Buildings in Manhattan see dramatic declines in equity, with some losing $400 to $500 million in value overnight. "Many developers and property owners must reconsider their strategies, and some are even handing over their properties," D’Angelo notes. This decline in commercial property value prompts an industry-wide reevaluation of how to maximize asset value.
Moreover, the fallout from the pandemic's impact on commercial real estate continues to unfold. D'Angelo predicts a surge in defaults within the next 12 to 18 months, as businesses abandon office spaces and commercial leases expire. As landlords struggle with vacancies and declining revenues, the move toward office-to-residential conversions gains momentum.
Navigating the Shift: Office-to-Residential Conversions Face Challenges
The shift from office to residential presents complex challenges. D'Angelo outlines the technical, legal, and logistical complexities involved in converting office buildings into homes. "New tenants want more than just a place to work—they want Michelin-starred restaurants, top-tier gyms, and modern wellness centers," D'Angelo explains, highlighting the demand for premium Class A office spaces. This leaves Class B and Class C properties, which are older and less desirable, as prime candidates for residential conversion.
D'Angelo emphasizes that converting these properties requires comprehensive feasibility studies, structural assessments, and close collaboration with legal experts. The Real Property Actions and Proceedings Law (RPAPL) 881, for instance, plays a crucial role by allowing property owners access to adjacent properties during construction. This legal mechanism is essential in dense cities like New York, where buildings are closely packed.
The Urban Housing Crisis: Conversions as a Solution
The ongoing housing crisis in cities like New York adds urgency to the office-to-residential shift. With affordable housing in short supply, converting underutilized office spaces into residential units offers a practical solution. "New York City faces a housing epidemic, particularly for low- and middle-income families," D'Angelo asserts, explaining that developers see these conversions as an opportunity to address this pressing need.
During Bill de Blasio’s tenure as mayor, regulations required that 25% of new residential units be earmarked for affordable housing. D'Angelo suggests that similar policies likely surface in office-to-residential conversions, ensuring that the benefits of urban revitalization are equitably distributed.
However, converting office buildings to residential spaces is far from simple. Developers must contend with zoning regulations, community concerns, and the structural challenges of transforming office layouts into livable apartments. Many older office buildings are not designed for residential use, making the conversion process expensive and complicated.
Legal and Operational Complexities: Managing the Transition
Converting office buildings into residential spaces also involves significant legal and operational hurdles. D'Angelo, an expert litigator, details how developers must navigate relationships with existing commercial tenants. In many cases, tenants continue to occupy parts of the building, which complicates the conversion process. D'Angelo explains that developers must negotiate buyouts with these tenants to vacate the premises, which involves legal disputes over noise, disruptions, and tenant harassment claims.
New York’s tenant protection laws, particularly the 2019 Housing Stability and Tenant Protection Act (HSTPA), make it more difficult for developers to force tenants out, requiring careful financial planning and legal expertise. D'Angelo stresses the importance of negotiations and buyouts in facilitating large-scale conversions.
Developers must also engage with local governments to ensure their projects align with broader housing and urban planning goals. As housing shortages worsen, government officials push for expedited approval processes for these conversions. D'Angelo notes that developers who incorporate affordable housing in their projects are likely to receive support from local authorities.
A New Urban Landscape: The Rebirth of City Centers
The office-to-residential shift represents a "strategic urban rebirth" that redefines city centers like Manhattan. D'Angelo asserts that these conversions will not only repurpose individual buildings but also reshape entire neighborhoods. Once dominated by commercial businesses, areas like Midtown Manhattan may transform into residential communities, complete with amenities that attract families and young professionals.
"Once these conversions are complete, we will see a dynamic shift in the fabric of Manhattan," D'Angelo predicts. The transformation will breathe new life into neighborhoods that have been traditionally quiet after business hours, altering the demographic and economic landscape of the city.
Opportunities and Challenges: The Future of Real Estate
The office-to-residential conversion trend offers significant opportunities for developers, investors, and city planners. It presents a way to address both commercial real estate vacancies and urban housing shortages. However, D'Angelo cautions that the process requires close collaboration among developers, legal teams, government officials, and community stakeholders to succeed.
"This is a once-in-a-generation opportunity to rethink how we use urban spaces," D'Angelo concludes. "The office-to-residential conversion is not just a response to current challenges—it’s a long-term strategy for creating more livable, sustainable cities."
As cities like New York evolve in the wake of the pandemic, the strategic reconstitution of office buildings as residential spaces signals a fundamental shift in urban development. This trend represents more than a temporary adjustment; it sets the stage for a new era of urban living, offering a blueprint for more adaptable and resilient cities in the future.
