Plan to convert landmark Manhattan office to housing lands key funding boost

Development venture lines up nearly $100 million in financing to kickstart overhaul

According to Katie Burke at CoStar News, "A proposal to transform a historic office building along Manhattan's Madison Avenue is a step closer to the start line after the project's development team landed nearly $100 million in financing.

A joint venture between Sunlight Development and investment firm NuVerse Advisors secured a $99 million loan to fund its plan to convert the Emmet Building at 95 Madison Ave. into a mix of luxury condominiums and ground-floor retail. Demolition work has already begun on the landmark building that was constructed in the early 1900s and is currently vacant.

Once complete, the conversion will result in 65 upscale residential units atop more than 20,500 square feet of commercial space. New York-based Sunlight expects work on the 16-story, 152,000-square-foot property will be wrapped up within the first few months of next year.

The development firm acquired the NoMad building for $65 million last year through a bankruptcy sale, capping off decades of dramatic disputes between its former owners. Sunlight estimates that its redevelopment plans will value the property at about $200 million, according to the firm's website.

In housing-starved markets such as New York, conversions have created an alternative avenue for developers and landlords behind office properties that are struggling in the face of diminished demand.

The number of office conversions across the country has hit a record high, according to a recent CBRE report, a pipeline only expected to widen as cities dole out more incentives and landlords — especially those of older buildings — sell their troubled properties at deep discounts in order to offload the financial burden.

Conversion traction

The widespread valuation decline rippling across the national office market is unfolding as housing demand continues to soar, with New York maintaining its role as one of the most in-demand regions in the world, according to CoStar data.

At less than 3%, the city has one of the lowest multifamily vacancy rates in the country, the data shows, and the constricted supply pool has meant annual rent growth is more than double the national average.

Empty office buildings have become a popular target among local officials, housing advocates and property owners who argue that the properties would be more successful as housing. Yet even with an office-to-residential pipeline encompassing more than 8,000 proposed units, challenges that range from infrastructure to financial have made it difficult for developers to get many projects over the starting line.

Those hurdles haven't stifled optimism in the city, however, with roughly one-quarter of the $2.2 billion in New York City development sales in the first half of last year going to buyers interested in pursuing conversion projects, according to research from Ariel Property Advisors, a real estate consultancy firm.

Along with Sunlight Development's Madison Avenue deal, investment firm Yellowstone last year acquired the office building at 1740 Broadway through a deed-in-lieu transaction that closed at a nearly 70% discount to the property's previous selling price. The new owner is planning to convert the high-vacancy property into a residential use.

A joint venture between TPG Real Estate and GFP Real Estate plans to overhaul the building at 222 Broadway into as many as 800 residential uses following its $148 million acquisition. TPG also aims to convert the building at 250 Church Ave. into a new residential use, a scheme it is pursuing with Skylight Real Estate Partners and Cannon Hill Capital Partners."

The trend of converting traditional office buildings into multifamily residential units, as illustrated by the redevelopment of New York's historic Emmet Building, has significant implications for property taxes in urban areas. This shift is not only reshaping the real estate landscape but also redefining the way local governments approach property valuation and revenue generation.

Increased Assessed Value

Conversions often result in a higher assessed property value due to the transition from underperforming office spaces to in-demand residential units. For example, the Emmet Building's estimated post-conversion value of $200 million—up from its $65 million bankruptcy sale price—reflects the potential for increased tax revenue. As cities like New York experience housing shortages and strong demand for residential properties, the value of these converted assets often far exceeds their value as office spaces.

Shift in Tax Base

The shift from commercial to residential use alters the tax base for municipalities. Office buildings are typically taxed at commercial rates, which are often higher than residential rates. However, a well-executed conversion can yield higher overall tax revenue if the property's post-conversion value outweighs the difference in tax rates. Cities must carefully consider these dynamics to ensure stable revenue streams during transitions.

Economic Ripple Effects

The redevelopment of office properties into residential spaces can invigorate local economies. Luxury residential conversions, like the Emmet Building, often include ground-floor retail, further boosting the commercial tax base. Additionally, these projects can attract higher-income residents, increasing local spending and indirectly contributing to economic growth and higher property tax revenues from surrounding areas.

Challenges and Considerations

Despite the potential for increased revenue, office-to-residential conversions pose challenges for tax assessment and municipal planning:

Assessment Complexity: Transitioning properties require careful re-evaluation of their highest and best use, particularly as conversions can introduce mixed-use components (e.g., residential and retail).

Zoning and Incentives: Many cities offer tax abatements or incentives to encourage conversions, which can temporarily reduce tax revenue. Municipalities must balance these incentives with long-term revenue goals.

A National Trend

The office-to-residential trend is not confined to New York. Cities across the U.S., such as Chicago, San Francisco, and Washington, D.C., are also seeing increased interest in conversions. As older office buildings lose tenants due to remote work trends and structural obsolescence, cities are incentivizing these transformations to address housing shortages. The resulting tax revenue impacts will vary by jurisdiction, depending on local market conditions, tax policies, and the scale of conversions.

Conclusion

Office-to-residential conversions have the potential to revitalize urban cores, increase property tax revenues, and address housing shortages. However, cities must carefully navigate the complexities of valuation, zoning, and incentives to maximize the benefits of these transformations. The case of the Emmet Building highlights the opportunities and challenges inherent in this evolving landscape, offering a glimpse into the future of urban development and municipal tax policy.