In 2019, Manhattan Downtown South was full of techies eating at Sweetgreen and bonding over beers. The 12-story office building at 29 W. 35th St, valued at $73.5 million back then it was no different.

Now, four years later, its two biggest tenants, flexible office company Knotel and technology company Sprinklr, have left and the building has been foreclosed. It was put up for auction in August, with its lender asking $23 million, and received no bids, according to city records.

But a rezoning proposal could breathe new life — and new value — into the plethora of Class B and C office buildings bleeding through the city’s core. Under the city’s recently updated Midtown South mixed-use plan, large portions of the neighborhood could be converted to residential areas — a use that is currently not permitted.

The Midtown South mixed-use plan is centered around Penn Station, the Port Authority Bus Terminal, Herald Square and Bryant Park.

The areas span 42 blocks around Penn Station, the Port Authority Bus Terminal, Herald Square And Bryant Park. The proposal applies to most of the area between 23rd and 40th streets and Fifth and Eighth avenues.

Since late October, when the latest version of the rezoning plan was released, buyers began scouring the neighborhood for opportunities.

“We’re getting a lot of interest, questions and inquiries,” said Ashley Doukas, who chairs Adler & Stachenfeld’s land use and zoning department. “Currently, all production takes place around the city’s largest transportation zone, with Penn Station right in the middle of the rezoning area.

Despite its unprecedented access to transportation, the region has not rebounded compared to other labor hubs. In the third quarter, vacant office in Midtown South is 26.3%higher than Manhattan’s overall vacancy rate of 23.5%, according to a report from Cushman & Wakefield.

Even Downtown Manhattanwhere the financial district is located, has a slightly lower vacancy rate of 24.4%. Its supply of unused office space has declined and is expected to continue to decline as wave of residential conversions comes to the area.

However, buildings located in areas of Midtown South could not be reused due to government restrictions. Department of Town Planning seeks to overthrow. The mapped areas would have an area ratio of up to 18 with the potential to create approximately 9,700 housing units, of which 2,800 would be permanently affordable.

This represents an increase from the 4,000 units, a quarter of which are income-tested, that a previous project allowed. The updated proposal follows the lifting of the long-standing 12 FAR cap imposed by the government. Kathy Hochul signed into law as part of the agreement on the state budget earlier this year.

Ariel Real Estate Advisors” Howard Raber, who specializes in selling investments in Downtown Manhattanrecently negotiated the sale of two buildings – located at 250 W. 30th St. and 236 W. 54th St. – to Hiwin Group USA. The Flushing-based developer also recently purchased 245 W. 34th St, another site near Penn Station.

Raber said these sites are shovel-ready development land that works for Hiwin’s plans even under current zoning, but gives the developer a way to implement a business plan as soon as new regulations comes into force.

“Whatever happens tomorrow, it’s a bonus for that developer,” Raber said. “These are developers who have the means to seize the opportunity. I don’t really see any commercial sites today that will only be usable with rezoning.

The Midtown South mixed-use plan and the large City of Yes citywide rezoning aims to solve an ongoing problem housing crisis and create 24/7 communities in areas that relied on office work. Brokers and developers say more development in the redlined area will further rejuvenate Manhattan’s ecosystem beyond the rezoning boundaries.

MAG Partners has two multifamily projects near the rezoning boundaries, at 243 W. 28th St. and 300 E. 50th St. Although the projects have had leasing success, “tenants are yearning for more retail and animated streetscapes”, founder and CEO MaryAnne Gilmartin said.

“Residential uses and an (increased) FAR will breathe new life into the neighborhood,” Gilmartin said in an email.

For Manhattan neighborhoods stuck in limbo, brokers and developers say there is an increased perception of crime that despite crime rates. constant fallis off-putting for both tenants and investors.

“It’s just good for businesses to have a residential, 24/7 neighborhood where businesses can come back and people are walking the streets again. Once you have that public safety, all ships rise,” said Craig Waggner, managing director of the private equity investment sales group at Cushman & Wakefield. “Values ​​will rise. It is difficult to say when and to what extent, but it is certain that the values ​​should increase over time.

Courtesy of the New York Department of City Planning

Zoning proposed under Midtown South mixed-use plan

However, rezoning is not a panacea.

According to the draft proposal, the city’s mandatory inclusionary requirement will apply to new zones, meaning at least 20 to 30 percent of new residential units must be affordable to low- and moderate-income residents. Additionally, the projects would be built under the new 485-x tax incentive, which developers say makes housing construction affordable more difficult given the unionization requirements and lower rent caps than its predecessor, 421-a.

Add in the costs of converting or razing buildings in Midtown South, and the numbers don’t add up to an expected boom, brokers and developers say.

HKS Real Estate Advisors Managing Director and Managing Director Peter Carillo said he has worked with developers on conversions in different areas of the city. Due to the costs involved in making an office habitable, such as improving ventilation and creating access to windows, creating luxury apartments only makes economic sense.

“Is this a good idea?” Absolutely. Will this improve the city? 100%,” Carillo said. “But if the city doesn’t realize this major element, it will be very difficult to generate interest.”

Alchemy-ABR Investment Partners is among the developers who, under the proposed circumstances, are not interested. Nine times out of ten, a Midtown conversion isn’t possible, said co-founder and managing partner Brian Ray.

In cases where this is the case, the problem lies in the fact that a property must be vacant before a conversion can take place, forcing the developer to pay to buy out the tenants or be burdened with taxes before any construction can begin.

“I think one of the simplest solutions is to change some of the zoning to have commercial and (residential) in the same buildings,” Ray said. “And it’s really a fire department problem.”

Ray added that the hurdles of obtaining capital for any new project add additional challenges. As the capital market has stagnated, return expectations have shifted, meaning it is more difficult to justify investing in a risky redevelopment.

But compared to the previous version of the Midtown South mixed-use plan that would have allowed only 4,000 new units with a lower FAR cap, the rezoning is more attractive to lenders looking for a higher yield.

“You can’t take institutional capital and go to your investment committee with a New York office deal, especially a Class B and C midstream building,” Waggner said. “If you go to an investment committee with the intention of demolishing these three buildings and building 18 FAR units, then that becomes more attractive as a value-add opportunity.”

However, for existing Midtown South building owners who may struggle to defend themselves against debt service officers, the rezoning likely won’t arrive in time. For the values ​​to return to the properties, it will take even longer.

“These things move like glaciers,” Waggner said.

Meanwhile, several other neighborhood rezonings are underway across the five boroughs.

In August, New York City Council voted to approve the Bronx Rezoning of Metro-North stations, which allows developers to add 7,000 new homes around existing and future transport stations.

THE Long Island City A neighborhood plan is currently being developed in the system and could potentially lead to 14,000 new homesincluding at least 4,000 affordable housing units. In Jamaicaa rezoning project of more than 300 blocks is in the early stages of drafting.

These rezonings will not be as ultra-dense as Midtown South, nor in the middle of Manhattan, which is a value-add in itself. However, housing construction costs are much easier, Carillo said.

In the South Bronx“These buildings were purchased for between $50 and $80 per foot. In Long Island City, they were bought for $150 to $200, $250, but that makes sense,” Carillo said. “Once you exceed those numbers, it becomes very complicated.”