largeManhattan The skyline has long symbolized the fate of corporate America. The skyscraper boom of the 1920s heralded The rise of the modern office, packed with swivel chairs and desks. Demand for office space exploded in the 1970s as corporate titans emerged and Wall Street firms boomed, fueling a wave of new towers like the World Trade Center. Now, as hybrid work reduces the need for brick-and-mortar workplaces, a different kind of boom — driven by luxury apartments rather than offices — is gaining momentum.
At 25 Water Street in New York’s Financial District, the largest office-residential renovation project ever undertaken in the United States is underway. Located near the New York Stock Exchange, the building will transform a 1.1 million-square-foot (102,193-square-metre) office skyscraper into 1,300 apartments, ranging from studios to four-bedroom residences. The revamped building will include a basketball court, a spa and indoor and outdoor pools. It will also feature a rooftop terrace, an entertainment lounge and co-working spaces.
The building is part of a wider trend – one sparked by a flood of newly vacant office buildings. The amount of space needed by white-collar workers was already declining before the covid-19 pandemic, but the massive increase in working from home has left more buildings vacant.U.S. office vacancy rates soared above 17% in the third quarter of 2022, the highest level in nearly 30 years, according to data CB Richard Ellis, a real estate company.Some 8.4% of offices in London are unoccupied, far higher than The long-term average is around 5%.
CB Richard Ellis Nearly 20 million square feet of office renovations are estimated to hit the U.S. real estate market this year; a fraction of the total supply, but nearly five times as much as in 2016, when the firm began collecting data. In the intervening years, a third of all offices have been converted to residences (other favorites include hotels, and a growing number of life sciences laboratories). While most of the recent development has taken place in the big cities on the U.S. East Coast, offices are becoming homes in rich countries.
wrench at work
However, the transition would have been quicker if not for a series of challenges. Some are practical. apartment Every room needs natural light and windows – the large floor plans of modern office buildings often trap them in poorly lit and poorly ventilated spaces. Bathrooms in office buildings are often concentrated in one area, making plumbing a nightmare. Other challenges relate to red tape. Zoning laws restrict housing in many office areas. In some cases, height and density rules or affordable housing requirements increase costs. Consulting firm Moody’s Analytics estimates that less than 3% of the 1,100 New York office buildings it tracks meet various standards.
Meanwhile, developers planning to remodel offices must buy out or relocate existing tenants. Consequently, the financial case for conversion is often unsatisfactory. Only office buildings traded at a substantial discount are likely to achieve profitable transformation. In some cases, it can be more expensive to renovate an old office building than to build a whole new apartment building.
Some policymakers are working to make the process smoother. Cities are loosening zoning rules and experimenting with tax breaks as vacant office buildings threaten landlords’ bottom lines, commercial property tax revenue and the business of nearby stores and restaurants. New York Mayor Eric Adams predicts such incentives will bring 20,000 new apartments in his city by 2033. London plans to use its Square Mile space to build 1,500 new homes by 2030. Calgary, with a third of its offices empty, is home to a more ambitious plan. In 2021, the Canadian city launched a grant program for developers willing to give it a go. Officials have since pledged more than C$153 million ($115 million) in grants.
Currently, conversion is a growing but relatively niche pursuit. However, plunging real estate values, ever-emptier office cubicles and growing political support suggest things will accelerate. Moody’s Analytics expects the U.S. office vacancy rate to peak at around 19% in 2023 and remain elevated for at least five years. Even with a healthy economy, demand for office space looks unlikely to return to pre-pandemic levels. Research firm Gallup estimates that Americans with jobs that can be done remotely will spend 37% fewer days in the office than before covid hit.
In fact, the future may look more like Lower Manhattan. While 25 Water Street is new, office conversions in the area are an old phenomenon. After the 1987 stock market crash left nearly a third of New York’s offices empty, tax incentives were used to entice developers to convert aging office buildings into homes. The September 11 attacks accelerated the process, as businesses moved to other parts of town. About 83,000 people live in Lower Manhattan today, up from fewer than 700 in 1970.
The result is a family-friendly enclave, and a neighborhood that serves as a blueprint for struggling office hubs elsewhere. Children on playground swings and residents walking their dogs have transformed the fabric of what was once a 9-to-5 financial center. A nearby boathouse offers free kayak trips on the Hudson River during the summer. During the colder months, skaters gallop around the outdoor rink at Brookfield Place, a shopping center near the waterfront. The financial firm’s relocation comes as a group of more creative tenants move in, including two media giants, Condé Nast and GroupM. The death of office buildings doesn’t necessarily mean the death of downtowns. ■
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