Capital Is Flowing Back Into New York City Office Buildings

Much of the focus in New York City commercial real estate at this time last year was on taking office buildings and turning them into housing. This year, with optimism about the city's office sector on the rise, more money is going into those older buildings, intent on keeping them as workplaces.

“I think residential conversion is a great option for a very limited number of buildings,” L&L Holding Co. principal David Orowitz said at Bisnow’s New York 2024 Forecast event on Wednesday. “Where the bigger push is going to be is making office buildings what people want, and I think that’s probably where most of the capital is going to need to go.”

Investment and development activity are coming back to NYC after their pandemic-era swing to states like Florida with lower taxes and less red tape, city real estate and government leaders said at Bisnow’s event, held at the New York Marriott Marquis.

“I think anecdotally what we're hearing is that, if that was even real to the magnitude that people are describing, there is a reversal,” said Jennifer Sun, the New York City Economic Development Corp.’s executive vice president. “Things are trending positively.”

But which asset classes are attracting fresh capital may come as a surprise. After years of doubt over the future of office, the industry finally has confidence that stability is coming for the physical workplace.

Daily office occupancy measures are one reason for hope, CBRE Executive Vice President Gerry Miovski said. Although Kastle Systems' turnstile swipe tracker placed office occupancy at a pandemic-era record 51% in New York City for two weeks in December, average visitation rates provided by the Real Estate Board of New York and Placer.ai were even higher, at 67%. 

Those figures are some of the highest of any major city in the country and reflect the influence that the city's financial giants, some of the most stringent proponents of office mandates, have on its work culture.

Those firms are helping to bifurcate the office market, where trophy product is commanding rents as high as $200 per SF, Miovski said. The limited supply of the best-in-class office buildings hasn't dissuaded companies from pursuing more space.

“What has happened is that that market has actually gotten so tight that it's now starting to work its way down to the next tier in terms of quality of product,” he said. “That's a really good sign.”

That isn't to say the long-anticipated distress won’t hit NYC’s more troubled office assets, panelists said. But capital is already gathering in the wings, getting ready to step in when the right deals emerge.

One such player is RXR Realty, which announced a $1B debt opportunity fund last week with Ares Management Corp. RXR emerged from the ashes of the Great Financial Crisis, amassing the foundations of its $19B portfolio in the distress that followed, RXR President Michael Maturo said.

In 2009, as the company was buying up billions of dollars of office that was mostly in NYC, RXR was confronted with a conundrum, Maturo said: Should it buy a Sixth Avenue building that was 90% leased to JPMorgan Chase? 

“We debated for weeks whether we should do the deal, debating whether JPMorgan would still be in business,” he said. “That's not the case right now.”

Despite severely depressed office values and a sluggish leasing market, it’s an exciting time to be in the business, Maturo said.

“I would argue that today, there's going to be tremendous buying opportunities for the right assets,” he said.

The time for owners to look for new debt is now, in the first six months of the year when lenders’ budgets are fatter and the appetite to spend is higher, Affinius Capital Managing Director Samir Tejpaul said.

“[Lenders] are going to be very aggressive. We are seeing credit spreads tighten,” he said. “Now would be the time to get in front of folks and see what you can get done in your portfolio. As you go later in the year, keeping in mind there's an election later this year, lenders may not have the capital nor the bandwidth nor the desire to do the same business.”

But the enthusiasm for office is happening in tandem with a pullback from housing. Last year, Affinius signed financing deals for several projects in Brooklyn’s Gowanus neighborhood under the state’s pilot program extending the expired 421-a tax break. But those opportunities may no longer exist, Tejpaul said.

“The risk there is you need to deliver product before that mid-‘26 hurdle. So in terms of structuring those deals, we were focused on projects that had at least a six-month buffer,” Tejpaul said. “If you're going to go vertical on a project right now, you're probably not going to meet that ‘26 deadline unless it's a fairly small project.”

Tejpaul said he would love to see more tax abatements and incentives like 421-a for funding much-needed housing developments. The city's constrained housing supply amid significant demand has resulted in median rents breaking records for two summers in a row.

As part of the city’s attempt to stimulate more housing development, Mayor Eric Adams announced measures last year designed to facilitate converting obsolete office buildings into housing. Still, a lot more policy help is needed if the city is going to fix its housing supply and affordability crises, Midwood Investment & Development Chief Investment Officer Teodora Zobel said.

“It would be great, and probably an amazing time, for the city to pass a new 421-g or similar type of program to really provide some incentive for developers to tackle these buildings,” she said. “A tax abatement would go a long way. But short of that, I think it's going to be fewer [conversions] than people are expecting in terms of these buildings.”

RXR has looked at conversions itself, running into multiple complicating factors, Maturo said. Tenants have to be persuaded to vacate, lenders have to be enticed, and the building has to be one that can easily be made compliant with the city’s legal light and air requirements for housing.

“I think if the state and the city come together and put together a program with significant subsidies, there's some possibility,” he said. “But generally speaking, the cost of doing these reconfigurations is enormous. You're better off taking down the building and starting over.”