New York developer spends $1.5 billion to turn offices into apartments

  • Silverstein Properties has opened a $1.5 billion fund to convert unwanted office space into housing.
  • The move comes at a time when several major cities are struggling with high vacancies in their downtown areas.
  • Silverstein eyes acquisitions in New York, San Francisco, Boston and Washington, D.C.

That empty office building in your neighborhood could soon be turned into housing.

Silverstein Properties, one of America’s largest commercial landlords, announced the first week of December that it was raising more than $1.5 billion to convert unwanted office space into residential housing in markets ranging from New York to San Francisco.

Before the pandemic, office buildings were the cornerstone of central business districts across the country. Central offices were the reason employees braved traffic jams, hopped on public transit and bought their morning coffee and bagel from a local bakery. But in the two-plus years since the pandemic began, office occupancy rates have not fully recovered as remote work continues to empty city centers.

For example, data from commercial real estate giant CBRE shows that around 25% of all New York office space remains available for rent while other markets, such as San Francisco and Boston, face falling rates. equally high. These numbers are well above their pre-pandemic averages and seem unlikely to change given the high demand for remote and hybrid work opportunities.

Silverstein’s move also comes at a time when commercial real estate property values ​​are falling. Data from Green Street, a commercial real estate market analysis company, shows that the value of commercial properties has fallen by 13% over the past 12 months, lowering the financial barrier to entry for promoters who wish to undertake conversion projects.

Silverstein CEO Marty Burger told Bloomberg in a recent interview that these market conditions have created an estimated $10 billion opportunity to convert unwanted office space into new residential housing.

“Now is the perfect storm where the office is not in favor, and the residential market is very hot,” Burger said. “Hopefully we can acquire some of these office buildings that may be out of date or may not be their highest and best use as an office building, and convert them to residential use, which the city has desperately needed.”

Such conversion projects – also described as adaptive reuse – have become a tactic of choice for many residential developers during the pandemic, as banks, hotel chains and even some churches have abandoned their real estate in order to maintain a financial footing. steady.

According to a November study by RentCafe, developers have created more than 28,000 apartments through conversion projects in 2021, a 25% increase from 2020. The same study estimates that around 77,000 new apartments will be added nationwide via adaptive reuse conversions by completion. of 2022. If pandemic conditions persist and companies continue to allow employees to work from home, this figure could increase further in the coming years.

Doug Ressler, head of business intelligence at Yardi Matrix, which helped RentCafe compile the report, said large office buildings in central business districts and city centers are better suited for conversion projects because they are in dense areas with high demand for housing compared to buildings in more suburban markets.

And having taken a similar path before, Silverstein Properties is positioning itself as a leader in the emerging market. The company has converted an office at 116 John Street in New York’s Financial District into a 416-unit, market-priced apartment complex in 2021, rental listings site StreetEasy says.

Then, in May 2022, Silverstein and Metro Loft acquired a 30-story tower at 55 Broad Street, also in the heart of New York’s financial district, for around $180 million and plan to turn the building into market-priced apartments. , reported Commercial Observed in May.

Other developers, such as Emily Hubbard, co-founder of Sage Investment Group, which specializes in multi-family conversion projects, suggest conversions are a cheaper alternative to building new homes from scratch given that the cost of borrowing money and building materials has both skyrocketed in the past two years.

Conversions can also be profitable, Hubbard said. Sage acquired Econo Lodge and a Travel Lodge in Tacoma, Washington for $14.2 million and plans to convert both buildings into apartments. Hubbard told Insider in September that Sage expects each building to produce a return rate of around 40%, similar to other conversion projects Sage has completed.


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