High office vacancy rates are something the city has grappled with before. A recession in 1989 caused the citywide office vacancy rate to rise to 17% by 1991 (today’s vacancy rate is about 22%), while the average asking rent fell by 20%. This recession was followed by a boom in office development, with 62 million square feet of space built, according to figures from the Citizens Budget Commission. For comparison, 26 million square feet of space has been built since 2000, not counting the World Trade Center.
To ease the massive office space glut of the 1990s, the Financial District experienced a significant wave of office conversions thanks to the 421g tax incentive program. Between 1995 and 2006, the city’s Department of Housing Preservation and Development used tax breaks to encourage the conversion of 98 office buildings in Lower Manhattan to apartments.
This includes 90 Washington St., a 335,000-square-foot building originally constructed in 1969 and converted to apartments in 2005. Before the remodeling, the building’s value had fallen from $48 million in 1991 to just $17 million in 2002. When it was completed in 2006, it was worth $51 million, the Citizens Budget Commission found.
The tax program mitigated the high cost of building acquisition and remodeling. Then-Mayor Rudy Giuliani argued the city would recoup that money through economic development and revenue from a revitalized financial district.
Between 1995 and 2006, the incentive was used to convert nearly 13 million square feet of office space, or 13% of the Lower Manhattan office market, to residential use, resulting in the creation of 12,865 units. Almost 75% of the units were built as rentals, with the remainder being condominiums.
The dynamics prompted the developers to build or rebuild another 17,000 units without the use of 421-g.
Today, with 421-a — another tax program designed to encourage commercial housing with affordable housing — expired, the city has lost one of its opportunities to create homes that make developers money.
Any changes to facilitate office conversions would likely include an affordable housing component, said Valerie Campbell, land-use attorney at Kramer Levin.
“At some point, without more government subsidies or a new version of 421-a, it may not be economically feasible to include the type of affordable housing that the City Council wants to see in new zoning policies,” she said.
So far there are no incentives for mixed-income housing conversions in the city. But a panel commissioned by Mayor Eric Adams and Gov. Kathy Hochul proposed them in a report released in December, titled the “New” New York Action Plan.
The plan outlines 40 initiatives to reshape the city, including recommendations to improve central business districts, build more housing, add public spaces, activate storefronts and improve public transportation.