Dire headlines regularly pronounce the latest woes about Manhattan’s office and residential real estate markets, reflecting the dramatic shocks that continue to reverberate from the COVID-19 pandemic.
During the first quarter of 2023, Manhattan’s office vacancy rate hit 16.1% (as tracked by brokerage firm JLL) and then ticked higher to a record 22.7%. One expert warned of “a very significant distress cycle,” and others have predicted that office vacancy rates will remain above 20% for another three years. The loss of real estate tax revenue and other economic fallout looms large.
Meanwhile, Manhattan’s residential housing market remains tight. Some residential property owners are purposely keeping units off the market until it makes financial sense for them to sell. Many city-owned properties have vacant units that require wholesale renovations, which are unlikely for years. The restrained inventory is not likely to grow substantially in the coming months.
Nationally, the office vacancy picture is also grim. Occupancy rates exceeded 50% earlier this year for the first time since March 2020, the start of the pandemic, according to a firm that tracks workplace occupancy using building access data, but the rate hasn’t moved substantially from that number in recent months. And while some companies have begun requiring more in-office days, the shift away from five-day-a-week office work is here to stay for many employees. Recently, office vacancy rates were reported to have risen to 17% (up from 11% in 2019) in Silicon Valley.
Tech firms have reduced their office holdings; the sublease market in the valley was reported to have nearly 5 million more square feet of office space available than just four years ago, according to one real estate data company.
With hybrid work here to stay, a partial solution to the problems posed by Manhattan office vacancies and a constrained residential market is hiding in plain sight: Using the 1982 Loft Law as a framework to plan for the legal conversion of some existing loft office buildings to residential spaces.
A makeover of loft office buildings, particularly Class B and Class C buildings, could help mitigate the office vacancy crisis while bringing back economic and social vitality to certain Manhattan neighborhoods. The relatively minimal design and architectural changes required to transform loft office space to residential use marks the plan as a nimble way to increase available housing stock and help restore balance to a real estate market that’s been forcefully disrupted.
Looking back, moving forward
An available and workable model already exists for office-to-residential transformations of smaller buildings below 40th Street: The “artists’ colonization” and conversion of hundreds of buildings in SoHo and Chelsea more than 50 years ago.
At that time, the buildings were empty, victims of the collapse of the manufacturing industry coupled with significant population shifts.
Enter the artists. Groups of them discovered what others had abandoned: Buildings that were perfect for working and living. Expansive open floor plans, high ceilings, and large windows that let natural light stream in were more than suitable for their needs. The artists settled into many of them, living as squatters without the benefit of amenities such as code-compliant kitchens and bathrooms and city services, like residential trash pick-up.
A sense of desperation descended on landlords, whose previously profitable holdings were now a drain. They had little choice but to allow the artists to stay. Yet, the conditions of these buildings were unsafe and needed to be addressed.
In 1982, the state passed the Loft Law (technically Article 7-C of the Multiple Dwelling Law (MDL), which required landlords to make modifications to ensure proper light and air circulation, and to bring their buildings up to code. Those who created and approved the law recognized the sense of it all: spaces once used for manufacturing—and then abandoned—could be converted to residential use and preserved, with protections for both landlords and tenants. The Loft Law has been updated a few times since its original passage, expanding loft residential spaces beyond Manhattan to parts of Brooklyn.
The half-century-old solution of Loft Laws stands as a model for addressing today’s office vacancy/housing shortage dilemma. Paradigm shifts in work/life balance considerations, specifically the new—and future—world of remote and hybrid arrangements, demand that we alter our thinking and embrace ideas that can fortify New York City’s economy and its neighborhoods.
Thousands of loft office buildings from Chelsea to just south of midtown could serve as viable live/work residences, pumping new life into communities that have undergone dramatic transformations and economic upheaval since the pandemic hit over three years ago.
From challenge to opportunity
Office-to-residential conversions are already taking place. While gleaming skyscrapers with double-skin glass façades are unlikely candidates, some skyscrapers are already showing potential to be transformed—albeit at high costs—for a post-COVID world.
In larger buildings, for example, façades can be removed every five floors and the height of some floors can be doubled, providing design space for interior hydroponic gardens, indoor farms, and shared recreational spaces, all of which are attractive amenities for work-from-home arrangements. Some developers are already removing elevator shafts and creating new building cores that ensure residential spaces have the required amount of windows.
Central questions to ask now are:
What is the highest and best use of properties that are half-empty with little prospect of returning to near 100% occupancy?
What are the steps necessary to plan for conversions that provide light, air, required infrastructure, energy efficiency, and other amenities?
What are the likely costs of conversions and what incentives could help make them feasible?
And finally: What are the likely costs if nothing is done?
The dire real estate situation requires bold, proactive moves. COVID and work transformations have presented us with a complex set of problems but also a new opportunity to reimagine and rethink our city and address the financial fallout, which one think tank estimated as costing city businesses $4,600 in sales each year for every New York employee working from home rather than in an office.
City leaders should take an in-depth, neighborhood-by-neighborhood inventory of the thousands of Class B and C buildings suitable for conversion. Architectural knowledge is central to the task; architects are well-positioned to carefully evaluate building elements and systems to determine appropriate and sustainable designs and directions for new spaces.
These new “hybrid buildings” would be especially attractive for entrepreneurs who need the inherent flexibility and dynamism of spaces suitable for living and working to pursue their business and personal goals.
The smaller scale and existing characteristics of many loft office buildings make them even more suitable for conversion, and for consideration as mixed-use spaces. The ideal and typical loft building is a mid-block building on a lot that is 100 feet deep. Many of these existing buildings are too close to the rear lot line to be changed to residential use, which requires a thirty-foot distance. However, if we applied the provisions enacted into the Multiple Dwelling Law for the 1982 Loft Law to legalize the artists’ lofts, that distance could be fifteen feet and in some cases as little as five. This would open the way to overcome the largest obstacle to turning those buildings into residential use.
The Loft Laws could be amended in five to ten pilot areas to address code requirements, quality-of-life, and safety issues such as egress, venting, and plumbing. Using existing Loft Laws as the basis for modifications can prime elected officials to consider rezoning campaigns and, more broadly on the state level, additional changes to the state’s Multiple Dwelling Law to allow even more conversions.
The recently announced Manhattan Commercial Revitalization Program or M-CORE, is a smart step that can get the ball rolling in the form of tax breaks for conversions of some Manhattan buildings south of 59th Street.
Government leaders can consider additional incentives in the form of tax credits or abatements for building owners and developers who launch conversions during the next 18 months.
The workplace continues to change, so why not model this workplace evolution with a work-from-home variation that appeals to the market and supports already existing economic trends? What the Loft Law did was provide a path to the legalization of a 1970s work-from-home phenomenon focused on artists. Why shouldn’t we do the same today and consider that you can have employees in your home, for example, and create situations where this business model is feasible?
With Loft Laws as our model, we should move forward with a practical, sensible approach that can help address real estate market problems, work/life space challenges, and neighborhood needs. We already have the key ingredients: The determination, imagination, and resilience that have long been a hallmark of our city, its workers, and its residents, including the artists who paved the way a generation ago.