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The “New” New York Proposal and What It Could Mean for Commercial Real Estate

Last December, a panel of New York Ciity and State advisors led by Governor Kathy Hochul and Mayor Eric Adams published the “New” New York Panel for New York City: Making New York Work for Everyone. In what they deemed a new era of collaboration between city and state, the ambitious proposal sets forth three major goals, which are comprised of 40 detailed initiatives:

  1. Reimagine New York’s Business Districts as Vibrant 24/7 Destinations
  2. Make it Easier for New Yorkers to Get to Work
  3. Generate Inclusive, Future-Focused Growth

This roadmap for the City’s future addresses a variety of concerns, ranging from the need for more flexible zoning in business districts, the ever-looming housing crisis, the affordability of childcare, and overall city safety and cleanliness. While this is undoubtably a pivot in the right direction, the real challenge lies in bringing these aspirations to life.

In the three years since the pandemic began, New York City has largely reopened and continues to recover to near pre-COVID levels. According to Avison Young’s data, office visitor volume in Manhattan continues towards stronger in-person visitation, reaching just over half of 2019 levels and surpassing Q3 2022 (51%).

In some submarkets such as Midtown Core, Chelsea, and Times Square, the numbers are even more positive at 67.4%, 68.2%, and 69%, respectively. However, through this process, the rigidness of the existing zoning governance has been underscored.

Many Class B/C offices sit partially or entirely vacant and current zoning laws make it challenging to convert to a residential use, particularly in and around Midtown Manhattan. The code states that any office in a zoning district that allows residential use can convert if it complies with bulk regulations.

Given the architectural differences between office and residential buildings, this is often physically and/or financially infeasible. There are, however, a set of more flexible standards (light, air, yards) for conversion that a building may use if it meets certain criteria:

  1. Located in a district that allows residential use Located south of 59th Street, parts of inner Brooklyn and Queens, Downtown Jamaica, St.
  2. George or Coney Island special districts or in a special mixed-use district Building built before 1961, before January 1977 in Financial District (FiDi), Jamaica,
  3. Coney Island or St. George or before January 1997 in special MX districts.

The 1961 cutoff has severely hampered office to residential conversions in Midtown which is why the majority of office-to-residential conversions have occurred in lower Manhattan where the cutoff of 1977 is more lenient.

One of the initiatives brought forth in the Plan proposes extending this threshold to December 1990, a change that would unlock approximately 120 million-square-feet (sf) of potential office space conversions in Manhattan. There is also discussion around re-evaluating high-density Midtown zones that do not allow new residential use such as areas between West 23rd Street and West 41st Street that are currently zoned as manufacturing districts.

While these proposals are great in theory, some form of tax relief should be introduced in order to make conversion projects pencil. High construction costs, coupled with the increased tax rate associated with residential and the inability to pass-through real estate taxes to tenants, puts a great deal of burden on a landlord, not to mention the fact that there will likely not be affordable requirements attached to any zoning changes. Additionally, the New York City Council and Planning Departments are severely understaffed, impacting the timeline for any zoning text updated. Environmental reviews are also required to make amendments, and these processes are also long and costly.

Another initiative of particular interest for those in the commercial real estate industry is around reducing the barriers of housing growth to address the current housing crisis faced by the City. A recent Commercial Observer article states: “as the population is expected to hit 9 million by 2030, something that has not escaped the attention of city officials since a similar New York University study came out in 2016. AKRF, an environmental, planning and engineering consulting firm, and REBNY released their own study this week, however, that highlights the progress — or lack thereof — the city has made in meeting this need. Projects currently in the pipeline only meet about 14 percent of this demand.”

To remedy this, the Plan establishes a “moonshot” goal of adding 500,000 units to the supply over the next decade. This would require regulatory and legislative changes as the New York State Multiple Dwelling Law currently establishes a state-level FAR cap of 12.00x. If this cap were removed, city officials would be able to cherry-pick areas in which an increase in density would result in buildings that seamlessly fit in with the neighborhood fabric.

In Midtown, for example, many commercial developments far exceed 12.00x FAR, so larger housing projects would integrate quite nicely. Lifting the FAR cap would also target office conversions in under-utilized buildings, especially ones where larger floorplates without access to windows limits conversion potential.

In many cases, these buildings are “overbuilt” for residential floor area, so developers are limited in terms of what they can do because if they were to entirely tear the buildings down, the residential projects replacing them would be much smaller. On the other hand, trying to force a square peg into a round hole and retrofitting an office building to meet residential use requirements can be extremely costly and complicated (cutting out interior light-wells, etc.).

If the New York City and State can come together to lift this cap and amend the Multiple Dwelling Law for the betterment of the city, it would undoubtably result in an influx of new construction and conversion projects.

However, New York City is facing an affordability crisis, and any changes to the zoning or legislature pertaining to housing creation/conversions is destined to include affordable requirements. With the 421a- program now expired, new tax benefits to facilitate multifamily development must be introduced.

In the 1decade leading up to 2020, 90% of rental units built in the City relied on some form of tax relief, and the 421-a program was used in 68% of multifamily units constructed between 2010-2020. These statistics demonstrate the power of this essential resource and its impact on the development pipeline.

Governor Hochul’s initial replacement program proposal, 485-w, didn’t make it through the last budget. This program would have required deeper affordability tranches than the 421a, making it unlikely for any projects in Manhattan or prime neighborhoods in the boroughs to pencil, and even so, the plan failed to gain support and was rejected when it was brought to a vote. Clearly, it remains to be seen if the ultra-left-leaning anti-real estate force in the New York government will be able to pass any meaningful tax program.

As the conclusion of the “New” New York Plan clearly states, the successful implementation of all or parts of this plan will require “an effective and motivated government with appropriate and clear accountability and organizational structures in place.” There is an opportunity for real change to occur, but it cannot happen without a long-term partnership between City and State and a true alignment of goals. If government officials can set aside their political differences to focus on making New York the best place to live and work, there is an exciting future ahead and the positive impact on commercial real estate could be huge.

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