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“In this environment, you can be in a lot better building in a better location at a similar rent,” said Richard Litton, president of Harbor Group International, an owner of $19 billion in real estate. He said his firm would have “little, if any, interest in Third Avenue right now.”
One large Manhattan landlord is betting that renovations will lure tenants to Third Avenue. The Durst Organization has put roughly $150 million into renovating 825 Third Ave., a 530,000-square-foot, 40-story building that was largely left empty when tenant Advance Publications departed after 25 years. When the lease expired in 2019, Durst explored a potential residential conversion but opted for a commercial upgrade.
The building, which reopens in October, will be the ultimate market tester for demand for upgraded Third Avenue space. Durst’s renovations included new glass for upper floors, new heating and cooling systems, an updated lobby and an outdoor wraparound terrace. Smaller floor plates spanning 10,000 to 12,000 square feet in the upper part of the tower could draw interest from boutique firms seeking less space than vast, open layouts. Durst has signed three leases at the building, totaling 45,000 square feet.
The obvious solution to lower office demand in a city straining for affordable housing may seem to be converting the buildings into apartments. There’s precedent: After the Sept. 11, 2001, attacks and the 2008 global financial crisis, many offices in lower Manhattan were turned into luxury condominiums or rental buildings.
But many of those downtown conversions took place in buildings from the late 19th to early 20th centuries, which had smaller floor plates and better light, making them more attractive for housing units. In contrast, the struggling towers across Midtown are largely 1950s to 1980s offices, with giant, dark floors that are far harder to convert.
Zoning changes and subsidies also gave developers incentives to build thousands of apartments downtown post-9/11. In Midtown, there are currently no financial incentives for developers to make the costly renovations, and many offices aren’t eligible for residential zoning.
Bloomberg, working with architectural firm Gensler, examined two buildings, 655 Third Ave. and 767 Third Ave., to illustrate the opportunity – and complexity – in converting an office tower.
This building, with a more than 40% availability rate, isn’t ideal for conversion to residential use, according to Gensler.
While three sides of the building are unobstructed, the east façade is partially solid due to its configuration and an adjacent building, which could hamper sunlight for a large portion of units.
“The problem with Midtown is a lot of buildings need air and lights that the city requires, and you don’t always get that,” said Ran Eliasaf, founder and managing partner of investment firm Northwind Group, which is exploring residential conversions in the city. “Not every Class B building is an ideal target for conversion.”
This building is ranked as one of the best-suited for residential conversion on the Third Avenue strip, based on its smaller floor plates and good core-to-window depth, according to Gensler. Yet it too faces challenges.
Zoning laws in New York dictate that certain towers being converted to residential use are subject to residential floor area restrictions. While some older buildings can be fully converted, that generally applies to towers in certain areas built before 1962, and in lower Manhattan, 1977, according to Robert Fuller, studio director and principal at Gensler. 767 Third Ave. was built in the early 1980s.
The tower’s owner, Sage Realty Corp., ran the numbers on a conversion years ago, but found it wouldn’t make sense because zoning rules meant the company couldn’t maximize its square footage, said Chief Executive Officer Jonathan Iger. The landlord would also have to buy out the leases of the remaining office tenants, a costly proposition.
“Unless we see the level of private/public partnership that we saw post-9/11 in downtown Manhattan to help spur office-to-residential conversion, it’s not impossible, but it’s much harder to pencil out,” Iger said.
Another option for Third Avenue buildings would be luring tenants outside of the traditional finance, law and technology industries. Memorial Sloan Kettering Cancer Center recently agreed to buy a portion of 885 Third Ave., also known as the Lipstick Building, and plans to use it for academic and research offices.
But the longer-term shifts in work habits still loom, and it matters to more than just building owners. New York, like other cities, relies heavily on property taxes to fund schools, police and firefighters, as well as other services. Property taxes are the biggest source of revenue for the city, delivering about $1 out of every $3 taken in. And offices account for about a fifth of that.
Before the pandemic, the levies had climbed by about 6% a year on average, driven by rising property values. That helped finance new programs and services, as well as keep up with rising labor costs, said Ana Champeny, the vice president for research at the Citizens Budget Commission, a nonpartisan budget watchdog and research firm.
Manhattan’s major office districts were no exception, generating steadily more revenue. But, in the fiscal year that ended June 30, the first to take into account the impact the pandemic had on real estate, tax levies from those areas declined by 11% to $5.24 billion.
The biggest drop was in a part of Midtown East north of Grand Central that the city’s Department of Finance calls “Plaza,” which contains some of the Third Avenue properties.
Plaza
Midtown West
Midtown South
Grand Central
Financial/WTC
Insurance/Civic Center
$6B
5
4
3
2
1
0
FY2008
FY2022
Plaza
Midtown West
Midtown South
Grand Central
Financial/WTC
Insurance/Civic Center
$6B
5
4
3
2
1
0
FY2008
FY2022
Plaza
Midtown West
Midtown South
Grand Central
Financial/WTC
Insurance/Civic Center
$6B
5
4
3
2
1
0
FY2008
FY2022
Tax bills for the current year suggest a slight rebound in revenue from office buildings citywide, but the recovery could take years to play out, especially if tenant demand remains depressed. New York also raises almost $1 billion annually from a tax on large commercial leases, which could fall if demand from big tenants like law and financial-services firms remains soft, said Champeny. Office use also has ripple effects on other important parts of the economy, from the transit system to retail and hotels.
“It’s still early to tell what the structural change will be in both the economy and working and commuting,” she said. “But clearly, the city is facing some short-term challenges.”
Source: Office availability data provided by Savills and building owners. Availability rate refers to all space available for lease in a building, including vacant or a sublease space.
Editor: Kara Wetzel, Yue Qiu and Christine Maurus
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