What will happen to all of New York's empty office blocks and hotels?

Commercial real estate has been hit hard by the pandemic, but there are plans to convert some of the now empty spaces in the city into apartment buildings

Published Mon, Apr 19, 2021 · 05:50 AM

New York

MANY of New York's hotels and office buildings have been empty for more than a year now, as the pandemic continues to keep tourists and workers out of the city.

And some of those properties may never recover. An effort is afoot to take these eerily empty commercial structures and convert them to housing of some kind and perhaps other uses as well, potentially spurring a number of building conversions not seen since the crash of the late-1980s.

But in the development world, top-to-bottom makeovers can take years, and a robust recovery could make landlords think twice about reinventions. Space and safety requirements could also complicate some conversions, real estate executives say.

Still, with some companies allowing employees to permanently work from home, and officials bracing for tourism to not fully recover for years, there is support across the city for breathing new life into struggling buildings.

"Covid has expedited the ultimate repurposings," said Nathan Berman, the managing principal of Metroloft Management, a developer in the process of buying two large office buildings in lower Manhattan that have been hammered by the pandemic.

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These shell-of-their-former-selves buildings, which he declined to name while negotiations continue, would become market-rate rentals.

"They are perfect targets," he said.

From corporate high-rises in the financial district to boutique lodgings near Central Park to mid-market accommodations in midtown, real estate players are redeveloping or canvassing dozens of sites, those involved said.

So far, most of the attention has been trained on Manhattan, home to the city's largest business and tourism districts, and where the pandemic has dealt the harshest blows. But hotels in Brooklyn, where prices for buildings are generally lower, are also getting a look.

The conversions seem to fall into three categories: offices to housing, hotels to housing, and hotels turning into offices, though not for long stays but short-term sessions.

Decades ago, pre-war office buildings were all the rage for reinvention. In the financial district, which became hollowed out after insurance companies and investment banks moved uptown, developers grabbed up limestone and granite former headquarters and sliced them up into apartments. But there are not many of those grand old buildings left, at least downtown, forcing developers to consider newer structures, like glassy mid-20th-century office towers, which in some cases have become obsolete as fancier offerings have risen around them.

In March, more than 17 per cent of Manhattan's office space was vacant or soon to be, with a slightly higher rate downtown, said CBRE, the real estate firm. Few of those spaces have been so empty since the early 1990s.

Though many landlords are long-term investors who do not panic in tumultuous times, the ghost-town vibe may be at least causing jitters. Since the pandemic began a year ago, city projections suggest that Manhattan office towers are worth 25 per cent less.

It is a hard time to be a hotelier. Facing a drought of tourists and business travellers, about 200 of the city's 700 hotels have closed since Covid-19 hit, and many of those closures are expected to be permanent, especially as debts mount.

There are also many soured loans. Since autumn, hotels in the New York City area have led the country in terms of delinquencies, said the analytics firm Trepp, which tracks securitised mortgages.

In April, New York hotels accounted for US$1.8 billion in unpaid balances, far outpacing second-place Chicago with about US$1 billion past due.

Even though the construction of new hotel rooms does continue in the city, there have been casualties, both big and small. Hilton Times Square, a 476-room hotel, shuttered last autumn, and after months when the owner, Sunstone Hotel Investors, failed to make loan payments, wound up this winter in the hands of a lender with an uncertain fate.

Similarly, the Holiday Inn FiDi, a soaring 50-storey, 492-room high-rise near the National Sept 11 Memorial and Museum, is now in foreclosure because of its three troubled loans, said Trepp.

But smaller properties are in tight spots as well, like the 72-room Hotel Giraffe on Park Avenue South, which has fallen more than three months behind with its mortgage checks.

What is still up and running is often not being run as a typical hotel. Starting a year ago, in an effort to stop the spread of Covid-19 in often cramped shelters, more than 60 city hotels became shelters for 9,500 homeless people, an arrangement that continues at many addresses.

City and state officials have pushed for the conversion of hotels into affordable housing, but developers note that building codes could make that difficult.

For starters, apartments must be at least 150 square feet, while hotel rooms are allowed to be smaller. And apartments require kitchens, though in some affordable-housing complexes, tenants can share kitchen facilities, said Mark Ginsberg, a principal at Curtis + Ginsberg Architects, which has designed affordable projects.

Adding kitchens and enlarging rooms to meet codes could also ultimately reduce the number of beds, a counterproductive move, he said. It could also balloon costs, turning a standard hotel makeover with US$3 million in cosmetic changes into a US$30 million overhaul.

The state budget passed this month allocates US$100 million to reinvent hotels as affordable housing. Plus, US$270 million in the federal American Rescue Plan is designated for the homeless in New York, and those funds could potentially help finance conversions as well. And at least one landlord is considering the ultimate repurposing: demolition.

Vornado Realty Trust announced plans this month to raze the Hotel Pennsylvania, a 1,700-room building across from Madison Square Garden that opened in 1919, but has been shuttered for more than a year, and replace it with an office tower layered with outdoor gardens.

The Hotel Pennsylvania "is decades past its glory and sell-by date", said Steven Roth, Vornado's chairman, in a letter to shareholders. But he also suggested that there were fundamental problems with the city's hospitality industry that predate the pandemic. "The hotel math has deteriorated significantly over the last five years," Mr Roth wrote, "a victim of oversupply, relentlessly rising costs and taxes, and an ageing physical plant". NYTIMES

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