A Conversation With The Developer Behind The Country’s Biggest Office-To-Resi Conversion

Turning obsolete office buildings into apartments seems like the perfect solution to two huge problems clouding the future of big cities like New York, Chicago and San Francisco: sagging commercial property values and a lack of affordable housing.

The theory is often batted down by reality — most conversions are out of the reach of even highly motivated developers after factoring in zoning restrictions, cost and other complexities. But some are pushing forward on projects that could truly make a dent in these seemingly intractable issues.

At 25 Water St. in Manhattan’s Financial District, GFP Real Estate, Metro Loft Management and Rockwood Capital are turning the 1.1M SF 1960s office building formerly known as 4 New York Plaza into 1,300 apartments. Last month, the team scored a $536M loan from MSD Partners and Apollo for the purchase and redevelopment of the building, the largest transaction of its kind in U.S. history.

Brian Steinwurtzel, co-CEO of GFP Real Estate, spoke to Bisnow last week to discuss the physical changes the development team is planning to make at 25 Water, detail what made the lenders feel comfortable enough to finance the development, and offer some practical changes the government could make to enable other companies to take a similar path.

The redevelopment of the 22-story building, which has been serving as JPMorgan Chase’s back office, comes as New York City and state officials are ramping up their efforts to spur more of these conversions. This month, Mayor Eric Adams revealed a slew of proposals to adapt zoning laws and provide incentives to developers to turn empty offices into what he predicts could be 20,000 new housing units.

In Gov. Kathy Hochul’s New York Housing Compact agenda announced last week, she said she plans to introduce legislation that would "expand the universe" of buildings that can be legally converted from commercial uses to housing to include 120M SF of newly eligible buildings.

Steinwurtzel said work has already begun at 25 Water, which he estimated will cost more than $800M to convert and open in phases in the next three to five years. The joint venture acquired the property by buying the loan from DekaBank and executing a deed-in-lieu-of-foreclosure deal to take over the property from its previous owner, Edge Funds.

This interview has been lightly edited for length and clarity.

Bisnow: Let's maybe rewind back a little bit before the financing was announced. Tell me a bit about how the deal came together.

Steinwurtzel: We've been working on this transaction for over a year. CB Richard Ellis had originally brought the property to market maybe two years ago. And then Newmark had brought it to market, I believe late 2021. We've known Metro Loft for a long time. We have worked on some other potential projects together but never had done one together. And we decided to work together to try to acquire the building. We spent a lot of time with the seller trying to understand the project and the potential. And we ended up being introduced to the lender as well and got to know them and what they were looking to accomplish.

Bisnow: So when were you looking for an office-to-resi conversion? Or were you just looking for a building for a project? 

Steinwurtzel: We're agnostic to use. In terms of GFP's new development projects over the last five to 10 years, we've done our bread and butter, which was office lease-up plays where we're acquiring an asset that needs improvement. We do those improvements and then lease it. But we've also done conversions of office buildings or other buildings to dorm use. We are building a school right now. We’re building a theater. We’re the development manager for Lincoln Center's David Geffen Hall that we just completed. We converted a former manufacturing building that was converted to office, and we converted it to life science. So, you know, we have a number of different types of uses that we work on. When we're looking at these types of projects, we’re trying to establish some sort of a thesis or theory about what would improve the building. For this one, from the early onset, we determined that office was not the best use any longer and that residential really was the best use.

Bisnow: You closed on a big $536M loan from Michael Dell and Apollo last month. This is, from what I've read, the largest loan for an office-to-residential conversion in the history of the country. Tell me a little bit about what it takes to get a deal like that done in this current climate.

Steinwurtzel: I think that for us, we look at it as having the right basis, having the right team where you contribute a significant amount of equity ourselves. And our underwriting, I think, has enough leeway contingency that it makes lenders feel comfortable that we will be able to perform and eventually repay them on these loans.

We have the right basis, a path to vacancy. It's all as of right. We're investing a significant amount of equity ourselves, and our capital partner has a great reputation. And we have a team that has done this over and over again, complemented by another team that has done very sophisticated, very large projects. So I think all of those in combination give lenders a lot of confidence that we're the right borrower to do this kind of project.

Bisnow: How much equity did you put in?

Steinwurtzel: These projects typically require — the lenders are typically not going to lend more than 65%. So I think you can back into what the equity would be.

Bisnow: How much do you anticipate this is going to cost overall to execute on this conversion? And what's the timeline? How long do you think it will take?

Steinwurtzel: This will be an over $800M project. In most of these projects, we forecast three to five years. Of course, it will happen in phases. We're not going to just flip the switch and 1,200 or 1,300 units will just fill up that day. It's going to happen in stages. But really over three to five years. 

Bisnow: JPMorgan has the space on the market till 2025. So is that they're going to keep subleasing it? How does that transition work?

Steinwurtzel: So when I say path to vacancy, we were able to arrange, with the help of the seller, for the building to be entirely vacant really in the first quarter of this year.

Bisnow: So that was part of the deal? 

Steinwurtzel: I should say almost entirely vacant. But for all intents and purposes, basically entirely vacant in the first quarter.

Bisnow: How did you pick this building? The office-to-residential-conversion conversation has been around for a while, but I have seen analysis that suggests only 3% of office buildings are actually eligible for that kind of development. So what made this building a contender?

Steinwurtzel: It's a really good question. We look at dozens of buildings each quarter trying to identify projects that are viable. So for office-to-residential conversions for us, we need to have a basis that's low enough that it makes sense to invest. We need that path to vacancy, so we need to know that the building will be vacant so that we can put the residential units throughout. And we need as of right zoning so we don't have to go and get variances or have to deal with ULURP. So this building met all those requirements. When we signed the contract, we didn't anticipate the capital markets to turn as much as they did. But I think because of all the things we talked about previously, we were able to have a number of lenders that were willing to lend on this project.

Bisnow: So the lenders didn't go sideways at any point? Did you have to talk them off the ledge or anything like that? 

Steinwurtzel: Not any more than any other deal. I think this building — fundamentally, this project, the team — all met the requirements that these lenders had.

Bisnow: So no more scary moments than normal?

Steinwurtzel: Yeah, I'd rather be borrowing money in an environment where rates are falling rather than rising. But fortunately, we had a fantastic team, and that team performed. 

Bisnow: This time last year, I'd say many people were really doubtful that conversions would be widespread as a solution to the housing crisis. Do you think that narrative’s changing? And do you think you have hope that it's going to change as a result of this big deal? 

Steinwurtzel: We spend a lot of time trying to help people understand this market. New York City office buildings are still 86% or 87% occupied. So it's extremely difficult to convert a building from office to residential that is partially occupied.

Bisnow: When you say 'occupied,' you mean leased, right?

Steinwurtzel: Yes, and most space that is leased is being used in some shape or another. Maybe it's only being used on Tuesday, Wednesday or Thursday, but it's still being used. There are some buildings that have space that is leased that is dark, but I think the majority of space that is leased has to be used in some way or another. So even if a building might have the physical characteristics and the zoning to be converted, if it's not actually vacant or going to be vacant, it's not going to be converted until that vacancy occurs.

Bisnow: So it's the leasing that's the big challenge?

Steinwurtzel: There's three primary requirements. One is the building has to be zoned for it. Having to go get a variance or consideration in this political environment is something that we wouldn't undertake. The second one is that the basis has to be one where it's investable, so we need to buy it for a low enough price in order to justify putting the kind of dollars it takes to convert the building and take the risk with changing the use of that building. And then the third is what we just talked about, is that it actually has to be something that will be vacant. It's unlikely that someone would undertake a project if two-thirds of the building had a lease that goes for the next four-plus years.

Bisnow: So it's just the unique nature of this building? That was JPMorgan's back office, and you were able to work with the seller?

Steinwurtzel: You had a case where you had one tenant whose lease was occupying the majority of the building. And that tenant wanted to vacate. And so you had a building that was willing to be almost entirely vacant, plus the basis, plus the zoning. So those opportunities seem like they're few and far between right now.

Bisnow: As the conversation around office changes — because I feel like it is very different than it was last year, and people are maybe having a different take on how much space people will need — do you think that's going to adapt over the next few years, maybe as some leases run out and aren't renewed?

Steinwurtzel: Sure. But you know, the most promising thing that's happened, if you're looking to do office-residential conversions, is that the city and state are spending a lot of time trying to understand it and where they can potentially change code law or provide incentives to help stimulate this kind of work. So if they're able to come up with changes to zoning or incentives, there's a lot more opportunity that might come to pass. 

Bisnow: What needs to happen physically to the building? For example, I understand there are 50K SF floor plates. Is that an issue with light? How does that happen? Is it plumbing? What's the big change?

Steinwurtzel: If you're looking at the building, physically, the two primary things we'll be doing is we'll be carving out two light wells into the center of the building and then reallocating that FAR to a new tower on top of it. 

The second thing is the fenestration of the building will change significantly. So we will be removing a significant portion of the brick facade and putting a window wall, so basically walls of windows on each floor around the perimeter of the building. There's a lot of other things happening. But from a bystander's perspective, if you were just looking at the project and you walk by it every day, those are the two primary things that you would recognize.

Bisnow: One thing that often comes up when I talk about this with people is plumbing. That's the big question the average Joe asks, 'How does the plumbing work if it goes from an office to a home?’

Steinwurtzel: You know, if the building was occupied, I think it'd be a very big issue. But with an empty building, we can run new risers really throughout the building, so we will be having new vertical plumbing risers wherever there are new units being built, and all the units will have their own bathroom — a very nice, high-end bathroom as well.

Bisnow: You just mentioned the political climate. The mayor's office just released a blueprint. They're calling it the office adaptive reuse study. It outlines what the city is actually doing to make conversions happen. I think they've said zoning changes, and I believe they've said tax incentives, tax abatements. Is that actually going to drive more of this, do you think?

Steinwurtzel: It has the potential to do it. So for example, Downtown, if a building was built after 1977, it's limited in the amount of the floor area that can be converted to residential. Whereas if it's built prior to 1977, the entire envelope of the building can be converted to residential. When they say they're considering changing that date, not just for Downtown but throughout New York City, to 1990, you're opening up the opportunity for hundreds, if not thousands, of other buildings that had been built since 1977. So, yeah, I think that that certainly makes it much more possible because now you're increasing the amount of buildings that are zoned as of right for residential. So there's a lot of suggestions and the work that's gone into that is, I think, very positive for this.

Bisnow: What have you heard from other industry members about this deal? I mean, surely, people are talking to you about it.

Steinwurtzel: I think people are excited to see what we're able to create there. I think that our peers think that the risk that we're undertaking is significant, but the fundamentals probably make it worth that risk. It seems like it's been well-received. Candidly, for a lot of our projects, a lot of our best projects are when others think that there's not a lot of potential. And that lack of competition actually leads to better opportunities for us.

Bisnow: Was there much competition on this particular building?

Steinwurtzel: I don't know the answer to that. I think the sellers did a very good job of masking the bid process. But we're happy that we were the winning bidder at the end of the day.

Bisnow: Is there a plan B? If you get started on this and you're like, ‘Actually, we've bitten off more than we can chew,’ is there something else where you can correct course and go back to office? Or can we turn it into life sciences? 

Steinwurtzel: Yeah, personally, I think multifamily residential rental is one of the best asset classes, if not the best asset class, to own in the long run. So we are very excited about building residential multifamily apartments in New York City.

Bisnow: So, this is definitely becoming a residential building? You've done your due diligence. It's happening?

Steinwurtzel: Yes, it's happening. As we speak.