Escalating NYC Office-To-Residential Conversions Delivering an Impact on Tax Revenue
The recently released report by the New York City Comptroller’s Office provides some economic and fiscal estimates of office-to-residential conversions based on data collected on 44 completed, ongoing, and potential office-to-residential conversions as of the 1st quarter of 2025. While the analysis is based on assumptions and economic conditions as of the first beginning of 2025, the economic outlook has since become more uncertain. Similarly to the acceleration of remote work arrangements, which was “equivalent to 40 years of pre-pandemic growth,” the “economic obsolescence for a subset of office real estate assets was just as fast.” Although the “doom loop” fear has dissipated, the report points out that “one key element to restore healthy economic fundamentals is the absorption of the excess supply of obsolete office space.” An increasing number of residential conversions combined with few new office building projects “should set the New York City office market up for a slow, but likely recovery.” The 44 buildings analyzed have a combined total of 15.2 million gross square feet and could absorb more than one third of the occupancy lost since the 4th quarter of 2019 in the lower tiers market and produce approximately 17,400 residential units. Sustaining the wave of conversions is New York City’s 467-m, also known as the Affordable Housing from Commercial Conversions Tax Incentive Benefits program (AHCC) enacted in 2024. The tax benefits are available retroactively to eligible projects that started since January 2023, the analysis citing 25 Water Street and 55 Broad Street as examples, and although projects are eligible for the incentive as long as the start date is prior to the end of June 2031, there is an added incentive of longer exemption schedules for earlier start dates, which is valuable to developers because the income-restricted units are subject to stabilization in perpetuity.
In Manhattan south of 59th Street, 12.2 million gross square feet containing 14,500 residential units, of which 3,600 units would be income-restricted, “could start renovation by the end of June and qualify for exemptions.” It is further noted that “In present value terms, the tax exemptions on these conversions (that is the amount of tax expenditure) are estimated to be worth $5.6 billion. Relative to counterfactuals where 467-m did not exist, over the life of the exemptions, our office estimates a $5.1 billion drop in property tax revenues on these conversions, in present value. More than 80% of the revenue drop is absorbed by the rent discounts on the income-restricted units.” The Comptroller’s report points out that “it is certainly plausible that not all conversions in Lower Manhattan would have taken place without 467-m and, at the same time, that some conversions in the rest of Manhattan would have been completed without tax incentives.” However, according to a related article by Crain’s New York, the Comptroller’s analysis “faults 467-m for offering more generous, 90% tax exemptions for all projects in Manhattan below 96th Street — even in Lower Manhattan, where office property values have fallen so far that landlords might have pursued residential conversions even without a tax break.” In addition, while it is possible that the incentive “could at the margin, trigger conversions to rental that would otherwise have been condominiums,” “data suggests that conversions to condominiums involve smaller buildings that trade, on average, at a price that make the choice to rental conversion not feasible even with 467-m.” However, “the relaxation of land use constraints that limited the stock of building that could be converted,” is increasing the city’s ability to absorb over-supply of office space and create new mixed-use and mixed-income neighborhoods.
Source: https://comptroller.nyc.gov/wp-content/uploads/documents/fn_economics_conversions_july.pdf