Developers across the country are keeping a close eye on 25 Water St. in downtown New York City. The 1.1 million-square-foot former building represents the largest office-to-residential conversion in the country, and if it succeeds, it could very well throw the door open wide for others to follow.
Metro Loft Management is rolling up its sleeves to tackle the landmark office-to-residential conversion project. The New York-based developer, along with partner GFP Real Estate, acquired the 22-story property formerly occupied by the Daily News and JPMorgan Chase. Work is underway on gutting the interior, and plans call for the addition of another 10 floors to create 1,300 residential units.
“We have been seeing this trend develop for years, and the pandemic really accelerated the pace and made it a necessity for a lot of office owners to look for alternative ways to market their properties,” says Jesse Schmidt, Senior Vice President of Sales at .
Conversions are being fueled by a convergence of trends that include office vacancies that are near all-time highs in many urban markets and a persistent shortage of housing. The U.S. needs to build 4.3 million more apartments by 2035 to meet the demand for rental housing, according to recent research from the National Apartment Association (NAA) and the Multifamily Housing Council (NMHC).
The growing pipeline of conversion opportunities has developers looking to veterans such as Metro Loft for secrets to success in what are notoriously complex projects. Founded by Nathan Berman, the firm has been involved in more than 5 million square feet of conversions over the past 25-plus years. “Metro Loft is one of the most prominent developers in the New York area that has successfully converted office buildings to residential,” says Schmidt. TheGuarantors works with Metro Loft and other major developers around the country to provide lease guarantees, security deposit replacements, and renter’s insurance products that help operators accelerate lease-up velocity by upwards of 30%. “Lease-up velocity is critical, and we help developers stabilize their properties while protecting their income and assets.”
Huge runway for opportunities
Metro Loft is at the forefront of the office-to-residential conversion trend. Metro Loft also is partnering with Silverstein Properties on the acquisition of 55 Broad St. in New York, with plans to convert the downtown building to a 571-unit residential project. The partners expect to close on the purchase of the building in July and begin work immediately.
“Based on what I’m seeing in the news, I would expect the amount of phone calls we’re already getting to double or triple within the next six months, because there’s going to be a lot more distressed assets in these B and C class office buildings,” says Mitchell Wasser, Chief Marketing Officer at Metro Loft. Wasser also expects more changes to zoning and building codes that will facilitate conversion projects as cities and states recognize they need to help find solutions to fill empty buildings and optimize property taxes.
Yet successfully executing these complex projects requires experience, knowledge and a certain amount of finesse. Conversions are highly risky with developers that need to navigate structural and design challenges, such as deep floor plates and outdated electrical and HVAC systems, as well as the current economic environment where both construction and financing costs are higher. Some of the risks that TheGuarantors is taking off the table are leasing and renter default risk.
Traditional methods that owners and operators have relied on haven’t kept pace with the changing renter dynamics, which now include more applicants that don’t have standard W2 income, such as non-U.S. citizens, students, recent graduates, self-employed entrepreneurs, freelancers and small business owners. TheGuarantors de-risks these renters, creating a bigger pool of qualified applicants for operators and increasing leasing velocity. “Given the increasing cost of pretty much everything relating to multifamily housing, making marketing spend more efficient when leasing up a new project is helpful. We help them convert more renters, turn them into signed leases, and on the back end, minimize their bad debt,” says Schmidt.
Managing leasing risk
Traditionally, Metro Loft would take a personal guarantee from an applicant to back the lease. However, that tends to be a slow process, and frankly, time kills deals. “The longer it takes me to approve someone and get an application completed and get a lease signed, the more likely it is that they will see something else, or end up going with another apartment,” says Wasser. Speed during lease-up is very important, not only for profitability but also in being able to show that progress to the lender, he adds.
At any given moment, Metro Loft might be working through 20 to 30 applications, which could mean gathering paperwork from 90 to 100 people at the same time. Utilizing TheGuarantors, which has the technology to approve applicants quickly, streamlines the qualification process and frees up internal resources, which is valuable in a market where every day counts, adds Wasser.
“Even though we still accept personal guarantors, we prefer TheGuarantors,” says Wasser. Covid exposed the serious risks of personal guarantors and the value of having lease insurance and deposit insurance backed by TheGuarantors. Among its younger renter demographic, Metro Loft has traditionally had parents sign personal guarantees for their child who is maybe in college or a recent graduate with a first job. Those parents are often located in another state, such as California or Washington state.
In a sense, the lease is covered. But the reality that played out during Covid is that when their child lost his or her job and stopped paying rent, it was incredibly difficult to get the personal guarantor to pay what was owed. “That happened quite a bit, and it was kind of a rude awakening,” says Wasser. On the other hand, Metro Loft collected easily from those people that had policies from TheGuarantors. “That experience solidified the importance of our relationship with TheGuarantors, and what they are doing is something that is needed not just in the New York market, but around the country,” he adds.
Boosting bottom line revenues
Lease and deposit insurance products can help owners and operators minimize bad debt and boost bottom-line revenues by guaranteeing rental income. Especially in high-priced markets, lease agreements can easily represent tens of thousands of dollars. , the landlord is usually stuck with the accounts receivable and has to resort to what can be a lengthy and expensive collection process. If that renter has a rent coverage policy, the landlord can file a claim and be reimbursed for losses in just a few days. And in the case of TheGuarantors, those policies are backed by multiple A-rated insurance carriers.
TheGuarantors recently introduced a new renters insurance and compliance product that automates the cumbersome process of ensuring resident coverage on a continuous basis, further reducing the work of leasing and property management teams.
In a conversion, or for any residential owner, there is a level of comfort knowing that if something does go wrong and someone defaults on a lease, the owner is still going to get paid. In the six years that Metro Loft has been working with TheGuarantors, the company has guaranteed more than $16 million in rent and security deposits. “We’re getting a guarantee from an insurance backed security saying that the rent is going to be paid, and that makes all of us sleep better at night,” says Wasser.