After Coming Up Empty On Office Conversion Deal In Albany, NYC Pushes Renovation Tax Break
A number of policy proposals aimed at turning obsolete city offices into badly needed housing didn’t materialize this legislative session, but officials and real estate players hope a new city program could help stanch the bottom of the office market's bleeding — for the time being, at least.
Property owners have until Aug. 1 to apply for the Manhattan Commercial Revitalization program — known as M-CORE. The offering, a strategic tax abatement aimed at encouraging office owners to revamp older office buildings that are struggling to attract tenants, is already experiencing “incredible” interest, a New York City Economic Development Corp. official told Bisnow.
Owners of buildings south of 59th Street that span at least 250K SF and were built before the year 2000 are able to apply for the program, which will be capped at 10M SF. Real estate players said it is a welcome move by the city to address its office woes, but its success is far from guaranteed.
Craig Deitelzweig, CEO of Marx Realty, said the program is a "good start," but the tight deadline presents a problem — essentially killing any chance investors could make acquisitions with the tax break in mind.
"I think it's great that they're trying to make something work," Deitelzweig told Bisnow. "I think the deadline, first of all, is just very soon ... [It could’ve] helped stimulate the market and get better products, but it's such a short time period, you can't use it that way."
The program, which went live this month, would reduce the mortgage recording tax for any financing taken out for renovations from 2.8% to 0.3%, waive sales tax for materials used on renovations or new equipment and abate taxes for project improvements for up to 20 years.
The minimal capital investment must be at 75% of the project location's current value for land, as assessed by the New York City Department of Finance for the most recent available year. Projects will be selected by the NYCEDC based on a criteria including the strength of the tenant attraction plan, project readiness and compliance with applicable local laws and regulations, like Local Law 97.
“This is really targeting transformational renovations. This is not just for setting up your lobby, this is about buildings making investments to comply with Local Law 97, about bringing new amenities into the building infrastructure, new health and wellness measures,” Melissa Román Burch, NYCEDC's chief operating officer, said in an interview. “We have had an incredible response from the real estate community.”
Román Burch said they are expecting the process to be highly competitive, particularly because it will be capped at 10M SF, which she predicts will be about 15 to 25 buildings in New York City. She added the program encourages new floor plan configurations and spaces that will be attractive to tech tenants and other members of the “innovation economy” that are growing in the city.
She said while office-to-residential conversions are an important part of the health of the city, making sure the office stock is globally competitive is also essential.
“This is a catalytic program,” she said. “M-CORE is a win, win, win — it's a win for office owners, it's a win for tenants, and it's a win for the city because of the positive fiscal benefits and economic benefits.”
Challenges in the office sector are continuing to plague the city. The availability rate in Manhattan is at 17.4%, per Colliers' most recent data for May. The rate at which people are coming remains stagnant, too.
Average building visitation rates in the first quarter hit 61% of the pre-pandemic baseline in the first quarter of 2023, according to the Real Estate Board of New York’s report, which relies on data from Placer.ai. That rate marked a jump from 51% during the same time period in 2021. Visitation rates, however, remained flat since hitting a 65%, a peak, in the middle of last year, per the report.
Public officials, real estate players and housing advocates had coalesced around the idea of converting office buildings to housing as an obvious solution for two of the city's major problems.
Mayor Eric Adams convened an Office Adaptive Reuse Task Force last year, which released a report in January with 11 concrete recommendations to make changes to state laws and city zoning requirements to open up more space that is eligible for conversion.
The task force projected if the recommended changes were implemented, it would open up 136M SF of office eligible for conversion. But one of its key recommendations — lifting the floor-area-ratio cap in the city — didn't pass in the state's legislative session.
“I'm sure that there will be more work done on this in the coming legislative session of the state … I don't think it was a wasted conversation,” said Fried Frank partner Anita Laremont, who was previously the chair of the New York City Planning Commission and director of the Department of City Planning.
Laremont said removing the 12 FAR cap would amount to taking away state control on the size of buildings in the city, a step some politicians would have been reluctant to take.
“The other issue is that, like many other issues, eliminating that cap to allow for conversions is perceived as a gift to the real estate community,” she added, pointing to the fact that there was no agreement on how to ensure any shifts actually generated affordable housing for the city. “There was no meeting of the minds whatsoever on that issue.”
She remains hopeful, however, that next year, the state legislature and Gov. Kathy Hochul will come together on better policies to allow conversions, though the challenges to actually turning a building from office to housing remain significant, even with loosened restrictions.
When it comes to M-CORE, Laremont said she isn't convinced there will be a huge takeup of the program. She said while it aims to improve office buildings, it doesn't address the wider challenge of a seismic shift in the way people use office space. Plus, there are construction costs and fiscal uncertainty to consider.
"I don't think it's going to materially move the needle in any respect," she said. "People tell me that they don't believe that there are a lot of owners that are actually even going to be interested in doing that, given the overall economic commercial climate and commercial real estate, it was a little effort that is not going to really be used."
Deitelzweig pointed out that even if an owner were to lock down the abatement, it still involves a significant capital injection, which lenders are loath to fund.
“This was to induce them in theory, but even then it's a lot of money that you would have to invest in the property and I'm not sure that that always makes the most sense for these buildings, or else these people would have done it already,” he said.
But Román Burch said the program is designed to push those sitting on the fence into making important upgrades, rather than convince people who have given up on their buildings to change course.
"This tax abatement program is discretionary, and it will not be around forever," she said. "In that regard, we do think it will be a powerful draw for serious office owners, investors and developers to lower the cost of their investment and to be the program that helps to unlock additional investment into this sector."
REBNY is welcoming the program as an effort to help find a solution to the most troubled part of the office sector, and whether there is demand for it will only be clear when it is up and running.
“I think there are a lot of people exploring whether it's a kind of program that makes sense for buildings in their portfolio. We will be able to better answer the question of market demand when we see how many actually apply and how many projects eventually enter the program,” REBNY Senior Vice President of Policy Zachary Steinberg said in an email. “There's no reason to be critical of the City or its approach at this point. If there isn’t demand for the program the market will tell us that and I’m confident EDC will look to make reasonable adjustments to get the results we all want to see.”