Dressing Room Dreams

In the late 2000s, I was hired by a commercial real estate fund looking at a new residential development project. They were in contract to purchase a beautiful warehouse loft building in the heart of Chelsea that was currently occupied by one of the top department stores in New York. The store was downsizing its real estate portfolio and would ultimately file for bankruptcy, but at the time their store was legendary.?

I worked alongside the developer and one of New York's top architects for 12 months slicing and dicing this turn-of-the-century warehouse loft building into 74 luxury residential lofts. This was before I worked on Walker Tower, but the concept was similar. We designed a building with beautiful three and four-bedroom homes that would cater to people who needed more space to grow their life in New York City. At the time, Chelsea didn't have too many large beautiful lofts, but it was known as one of the most expensive ZIP Codes in the United States. I knew there was a pent-up demand for large spaces in this desirable neighborhood, and if we built it, buyers would come. The building was a perfect example of what would constitute a successful conversion. It had high ceilings, tons of light, and wasn't too deep.?

Like many New Yorkers, I had spent several hours every year buying high-end suits at their annual warehouse sale. You could get a $3500 designer suit for $500! I remember working on the apartment plans knowing that I had probably tried on a suit in a dressing room that would become someone's kitchen.?I dreamed many times about how amazing this conversion would be for the building and the neighborhood.?It would be a game-changer.?

Then, as luck would have it, after a year, the client told me they had abandoned plans to convert the building because a social media company with wads of cash was looking for a New York Headquarters, and the loft building was perfect. It was right around the corner from Google's headquarters, and they were willing to pay a considerable premium to rent the entire building. The offer was low risk and too good to resist, so our condo plan was abandoned, and the new company moved in.

The income of the building was established, and it became a great investment vehicle for my client - who, one year later, sold the building to another fund, cashing out a profit of about $20M.

Next, the investment sales market took off, lending was easy, and this new owner sold it to another investment fund for a significant profit. The past three owners made bank, and everyone seemed happy. (Everyone except me and the architect). What would have been a magnificent residential building stayed an office building.

Then Covid came.

The office market tanked, the VC market softened, the tenant stopped paying rent (even though it's owned by the world's richest man), and the company put most of its New York City offices on the sublease market.

Now, this building is on the market again, and most of the people looking at it are analyzing it as a residential conversion. The only problem now is that lending is more challenging. Any new developer would have to sell apartments for much more money than my previous client because their basis in the deal would be much higher. However, the opportunity is still there. New York needs housing, and we have the space between the empty department stores and office buildings - but how do we get from here to there? The market will not sort itself out on its own this time. Lenders are rightfully hesitant, and developers know there is a limit to which they can sell a home, especially when you add in the high cost of labor and materials in New York. Local government will have to create tax structures and incentives that make sense for our new reality?-?or we will be stuck with a lot of empty dressing rooms and old office cubicles on our hands?- and more New Yorkers leaving the city searching for places to live.?

Side Bar

Some of my favorite photography is on the album covers for the jazz label Prestige. Esmond Edwards was a photographer for Prestige who took some of the most beautiful images for some of the greatest jazz albums ever. This past week, I stumbled upon the cover for Miles Davis' "Workin with the Miles Davis Quintet." There's a photo of Miles smoking a cigarette outside what seems to be the UPS shipping facility on Greenwich Street in Hudson Square - a street I've walked on over a thousand times and one of the few sites that remain mostly unchanged over the past 100 years. Like the photo, the album is a work of art worth appreciating.

Let's do this -

Shaun