The Future of NYC Real Estate: Office-to-Residential Conversions 2024

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The value of office spaces has dropped by approximately 40% in New York City since the pandemic, and interest rates have doubled. According to Moody’s, one in five office spaces is vacant. So, converting commercial rental real estate into residential apartments in New York City and beyond may present a strategic opportunity with significant potential benefits for landlords and building developers, despite the inherent challenges involved.

Repurposing existing commercial properties into residential units allows landlords to capitalize on the city's robust housing demand, potentially boosting property values and rental incomes. For developers, this approach can lead to cost savings and faster project timelines compared to ground-up construction, leveraging existing infrastructure and amenities.

However, the feasibility of such projects hinges on navigating regulatory hurdles, zoning requirements and technical challenges associated with converting traditional commercial spaces to residential use. These include addressing structural modifications, ensuring compliance with building codes and adapting spaces designed for commercial purposes into habitable residential units. Despite these complexities, successful conversions not only promise financial rewards but also contribute to urban revitalization efforts, creating diverse housing options and revitalizing communities across New York City.

Conversion Costs and Tax Implications

The financial viability of office conversion projects presents a significant hurdle. Most office spaces are not inherently suited for straightforward transformation. Their expansive floor plans make it challenging to divide them into residential units that meet natural lighting requirements. Additionally, structural column positioning of traditional offices complicates the installation of residential plumbing and ventilation. The cost of conversion per square foot in New York is estimated to be between $300 to $500 per square foot.

From a tax perspective, the capital-intensive costs of converting a commercial building for residential use would generally need to be capitalized during the entire construction phase. Some assets within the building system may not be adequate for a residential building and thus would need to be abandoned. The abandonment of such assets brings an immediate tax deduction for the property owner for the total remaining underappreciated value of the asset being abandoned. An important tax consideration right after the construction is a cost segregation study. Cost segregation is a tax strategy that property owners use to speed up depreciation deductions on their properties by classifying the components of a building into shorter depreciable lives.

Cost segregation

Once construction is complete and the residential units are placed in service, another cost segregation study should be considered. Typically, the depreciable life of a residential building is 27.5 years for tax purposes. However, through cost segregation, you pinpoint and assign particular property components to shorter depreciation periods; five, seven or fifteen years — resulting in substantial initial tax deductions and reduced tax obligations. Various property components such as furnishings, cabinets and millwork and carpeting can all qualify for accelerated depreciation.

These property components may also qualify for bonus depreciation. Bonus depreciation permits the additional write-off of an eligible asset’s value in addition to standard depreciation. Bonus depreciation for applicable assets is set at 60% if the property is placed in service in 2024 and is scheduled to gradually decrease in the coming years. There are many possible avenues to achieve higher deductions by utilizing proper and timely tax planning related to the depreciation of assets. 

Benefits Specific to New York City

To encourage building owners to consider residential conversions, Mayor Eric Adams has established The Office Conversion Accelerator program. This program provides building owners with a single point of contact within city government to help ensure office conversion projects can be completed in a Code-compliant and timely manner. This program is designed to assist building owners considering an office-to-residential conversion project that might provide 50 or more housing units. The Office Conversion Accelerator includes representatives from various city agencies to advance opportunities for conversions.

Over 50 buildings have already been enrolled in the program, which will assist owners with conversions, from analyzing the zoning feasibility of individual conversion projects to helping conversion projects secure necessary permits. Property owners of existing office buildings can seek the interagency team’s help to identify barriers to conversion and expedite pathways to overcome those barriers. 

Additionally, the mayor’s office is proposing various changes to city regulations to help expedite the conversion process. These changes include: 

• Allowing non-residential buildings to convert to residential housing anywhere in the city where residential uses are permitted. Current law only allows conversions in select office districts.
• Allowing for conversion eligibility for buildings constructed before 1990.
• Ending parking space mandates for newly constructed housing and office conversions.
• Allowing residential buildings to have a floor-area ratio larger than the current limit of 12, possibly enticing larger offices to consider conversion.

New York State Incentives for Conversions

While converting an office building into a residential complex requires a significant amount of money, the costs can be offset by real estate tax exemptions offered by New York State.

Two new property exemption programs were introduced as part of The Fiscal Year 2025 New York State budget, the Affordable Neighborhoods for New Yorkers Program (ANNY), or 485-x, and the Affordable Housing from Commercial Conversions Program (AHCC).  These programs were part of Albany’s plan to add affordable options in this housing crisis. 

The Affordable Housing from Commercial Conversions Tax Incentive Benefits program provides a partial exemption from the New York City real property taxes for conversions of non-residential buildings. Some of the program requirements include:

• AHCC Program Benefits are available to Eligible Multiple Dwellings that contain six or more dwelling units, where the Eligible Conversions commenced after Dec. 31, 2022, and on or before June 30, 2031, and where the Eligible Conversions are completed on or before Dec. 31, 2039.
• At least 25% of the units would need to be permanently affordable and rent stabilized as defined in the program.
• A 100% property tax exemption during the construction period. For conversions, the commencement date is the date on which actual construction lawfully begins in good faith.
• A property tax exemption period that ranges from 25 to 35 years depending on the location of the building and the year in which the conversion work starts.

Program incentives include:

In order to receive the full tax abatement, construction on conversions must begin by June 2026. After that, it falls to 30 years and then to 25 years after June 2028. Conversions that start after June 2031 will not be eligible for the tax benefit.

The Affordable Neighborhoods for New Yorkers Program (485-x) offers property tax incentives to developers who create affordable housing units.  In this tiered program, eligible projects can receive a property tax exemption (between 10 and 40 years) based on various factors including their project size and number of affordable housing units. 

Federal Tax Incentive

In addition to the above state tax benefits, energy efficient federal tax credits are available to multifamily developers who take part in constructing energy-efficient homes.

As part of the Inflation Reduction Act of 2022 (IRA), the IRC 45L tax credit was amended for residential buildings acquired or renovated after Dec. 31, 2022, and before Jan. 1, 2033.  This amendment made it easier for developers to claim the credit by removing size restrictions. Residential buildings that meet certain energy-efficient criteria, including improvements in insulation, windows, doors, heating, cooling systems and the building envelope, can receive a tax credit per unit.

The two thresholds are the Energy Star and Zero Energy Ready Homes programs. The Energy Start requires a specific percentage of the unit to be energy efficient and has a maximum credit of $2,500 per unit. The Zero Energy Ready Home is a new program that requires high-energy unit performance. As such, the unit’s renewable energy system could offset most or all of the unit's annual energy use. The maximum credit available for a Zero Energy Ready Home is $5,000 per dwelling unit. Under the new rules, a 100-unit development could result in tax credits totaling $500,000.  Both programs have extensive requirements and must be certified by a third-party inspector, but the credits could be abundant.   

 For More Information

Our experienced commercial real estate team at CBIZ is here to help you navigate the latest tax exemption programs and maximize your potential savings. Connect with one of our experts today to discuss your specific needs and see how CBIZ can help you achieve your real estate goals.