Cuomo Wants Empty Offices, Hotels Converted Into Housing. Most Landlords Aren't Ready To Make The Leap

New York Gov. Andrew Cuomo's ambitious plan to create more affordable housing in New York City by pushing developers to convert their empty offices and hotels to affordable housing is facing headwinds before it even launches.

The measure, laid out in Cuomo’s State of the State address last month, has prompted a tug of war between Cuomo and Mayor Bill de Blasio over who has the authority to change city land use laws. Beyond the political issues, mass conversion of commercial space during an uncertain time is complicated — and landlords may not be ready to give up on their historically lucrative commercial spaces and convert just yet.

“It will be a commitment to make that conversion, you are really betting that the market isn’t going to come back for hotel and commercial if you make that conversion,” said Nora Martins, a land use attorney and partner at Akerman LLP. “So realistically, I don’t know how many property owners will consider that … It’s an interesting idea, but whether it makes sense in the long run, I don’t know.”  

Cuomo’s proposal would override municipal land use laws and loosen the statewide building use laws. Class-B and Class-C office space and hotels with fewer than 150 rooms could be converted into multifamily buildings if 20% of these new apartments are affordable. The legislation would apply to hotels in the outer boroughs and between the Financial District and 110th Street in Manhattan. 

Office buildings that could be converted would need to be between 14th and 60th streets and between Park and Ninth avenues. If the plan makes it into law, those converting the properties would be able to work around certain zoning rules on light and air requirements that normally apply to residential.

The proposal comes at a crisis point for affordable housing in the city, one that the coronavirus pandemic has acutely exacerbated. Meanwhile offices and hotel rooms — the bread and butter of the city’s commercial real estate market — sit largely unoccupied. 

The governor’s proposal would put the state in charge of a matter that is typically reserved for municipalities. Last week, de Blasio slammed the plan, claiming it would eliminate community input from the land use process and unduly take power away from local governments.  

“We strongly oppose doing away with city zoning regulations and the land use process to allow the conversion of commercial property and hotels to housing,” de Blasio said. “The crisis is not an excuse to overturn the will of struggling communities and give away local control to wealthy real estate interests.” 

The de Blasio administration previously vocalized support for a similar commercial-to-residential plan in December, though it was not one that would take land use power away from the city.  

Mitch Korbey, a land use attorney and partner at Herrick Feinstein LLP, agrees that land use decisions should be left up to the city. He pointed out there is already a process within local law — an article in the city planning commission's zoning resolution — to convert commercial buildings to residential, and that the city has far more planning and zoning staff than the state.

“The city already does a very good job incentivizing this,” he said. “I just don’t think [the state has] the talent and expertise that City Planning has. It’s an important topic … but it’s not something you do overnight, it’s not something you do without careful analysis, but the [fact] that we are having this conversation is a good thing.” 

The city-state spat over the proposal is just the latest in a years-long power struggle between Cuomo and de Blasio, one that has only intensified over the past year as they butted heads over the response to the coronavirus pandemic. It also comes amid calls for change to the land use and zoning process in the city; tenant advocates say the current model doesn't adequately gauge the displacement prompted by land use changes.

The Real Estate Board of New York proposed a similar program before Cuomo’s announcement. The organization previously told The New York Times that it hoped the city and state would change zoning laws and incentivize landlords with tax breaks to make these conversions easier. 

“This forward-thinking approach will make such areas even more attractive to cutting edge businesses and their employees,” REBNY President James Whelan told Bisnow in an emailed statement. 

On Bisnow's podcast last month, REBNY Senior Vice President for Government Affairs Reggie Thomas said the proposal could make a real difference in the city. 

“It’s a good idea, we are in an affordable housing crisis in the city," Thomas said. "Any opportunity to be able to think creatively, to think outside the box is something that we should be doing right now."  

The mayor’s office and the governor’s office didn't respond to Bisnow’s requests for comment. 

REBNY has said there are about 150M SF of Class-B and C office buildings in Manhattan, and at a 10% conversion rate, that would create some 14,000 new units — much of which could be affordable housing, FastCompany reported last month. 

While 14,000 housing units is a significant figure, it isn't yet clear exactly how much housing the city will need in the future, according to economist and Senior Policy Fellow at the NYU Furman Center Mark Willis. 

“We don’t know what post-pandemic America and post-pandemic New York City will look like,” he told Bisnow. "We just don’t know how many people want to live here, we have to find that out." 

There is mounting evidence that hundreds of thousands of New Yorkers have left the city — a trend that was already underway before the crisis. Market-rate apartment vacancy has spiked and rents have sunk, a reversal from the previous two decades.

The Furman Center’s 2018 figures showed job growth increased by 16% in New York City between 2000 and 2016, but the housing stock went up by just 8% over that same time period. Willis is certain the city will continue to be a place people want to live long-term, but the upcoming supply-demand dynamic is a mystery.

“When we know, the quicker we can adjust to it the better off we are,” he said. “That is what the conversation now is about: making the systems flexible enough, so if it turns out if an owner of that property says, ‘I don't have enough tenants, or I can’t get enough rent from office tenants, but lots of people want to live here,’ they can do that.”  

Undoubtedly, office and hotel buildings are in a bleak position right now. Though office buildings have been allowed to open since last summer, many major office landlords are reporting occupancy levels as low as 15% as few companies have opted to bring their workers back to their desks. 

There is a greater existential threat that occupiers will shrink their footprint as remote work becomes more widespread, but many argue a large portion of the workforce will want to return to a traditional workplace — or less traditional job markets — once the immediate crisis has passed. Hotel occupancy in the city is less than 50%, and some industry groups have predicted as many as 20% of the rooms in the city may never open again.

Few, if any, are predicting that tourism won't eventually return, as widespread testing and vaccination allows the city to come back to life. 

“The governor is right, there may be an oversupply of commercial space, but I think it’s going to take a while to figure out are people coming back or aren’t they coming back,” said GFP Real Estate Chairman Jeffrey Gural, who owns several office buildings in Manhattan. “Right now, we are not thinking about converting, our initial hope would be when people come back and things go back to normal, we will be able to rent it as office space.”

He noted the conversion of an office building is an enormously challenging undertaking. GFP converted an office property it owned downtown, but Gural said it was a unique situation in that it was mostly empty and it was easy to move the sole tenant to a property the company owned nearby. 

“I think the first step is to wait until June or July when hopefully enough people are vaccinated that they are asked to come back,” he said. “It's going to take a while to see how things shake out.”