N.Y.'s success in office conversions gets attention here
It's been nearly 20 years since New York City planners laid out a vision to convert dozens of lower Manhattan's vacant office towers to apartment buildings. And as industry leaders ponder the fate of New Jersey's aging office network, developers here are exploring whether some of those properties can follow a similar path.
Such conversion projects are still far from reality — especially in the face of financial challenges and skepticism among hundreds of local governments here — but some real estate companies are now openly weighing the idea. Others, meanwhile, are acquiring well-placed office buildings with hopes of repositioning them as residential space, which experts say is a logical choice in markets that have lost their luster as corporate hubs, but still have attractive infrastructure and access.
"When some of these buildings were completed, those were considered prime locations as employment centers," said Jose Cruz, a senior managing director in the Florham Park office of HFF, the mortgage banking firm. "And they're still drivers of where people go, but now they're seen more … as multifamily locations."
Cruz is brokering the sales of two office buildings whose buyers are considering conversions to multifamily, he said, though neither has met formally with local officials about such plans. The first is 1111 Durham Ave., in South Plainfield, a 237,000-square-foot building along I-287 once occupied by Motorola and Prudential; the other is a 150,000-square-foot property at 1500 Harbor Blvd., in Weehawken.
In Fort Lee, a developer has proposed converting its 1 Executive Drive property to residential use, according to the brokerage firm CBRE. The building's owner, Chetrit Group, of New York, did not return requests for comment about the site.
The prospect of recasting struggling office properties is front and center for Mack-Cali, the Edison-based real estate giant that is quickly growing its multifamily presence. During public events in recent months, CEO Mitchell E. Hersh has floated the idea of repositioning its 475,000-square-foot property in Upper Saddle River, which Pearson Education is vacating next year, with high-end residential units and other uses. Mack-Cali declined interview requests for this story.
Finding new life for underused offices has long been a growth strategy in New York, where officials in 1995 enacted a plan to convert scores of buildings downtown. Since then, conversion projects have added nearly 14,000 units to lower Manhattan, according to the Downtown Alliance, the business improvement district.
"New York City already went through this, and the results were fabulous," said Michael Allen Seeve, president of Mountain Development Corp., in Woodland Park. "Generally speaking, we could take some inspiration from that successful model."
Efforts to take large blocks of office space off the market would find favor here. Through March, office vacancy in northern and central New Jersey was at 19.1 percent and 22.4 percent, respectively, according to the New York-based real estate research firm Reis Inc. Apartment vacancy, meanwhile, is at 3.6 percent and 2.9 percent.
The disparity is similar in markets where office-to-multifamily conversions are being considered: Reis found office vacancy in the Piscataway-South Plainfield submarket was 25 percent at year's end, compared to a 2.6 percent apartment vacancy rate in the Northwest Middlesex submarket that includes much of the same area.
David Opper, a broker and senior vice president in CBRE's Saddle Brook office, said the tepid office market is largely a product of companies "condens(ing) their real estate footprint." That steers tenants toward newer, more efficient buildings, he said, so "it would be a logical next step" for older buildings to become targets for multifamily or alternative uses, especially those in attractive markets.
But Opper also cautioned that the approach is largely untested here: "We don't know yet, because it hasn't taken place and we haven't necessarily seen the pricing correlated with that, if it's economically feasible."
A big driver of conversions in New York was a 14-year tax abatement that helps defray development costs. And Seeve said the process is "not inexpensive. Conversions are major projects, and I don't think property owners are advocating for them lightly."
The other key variable for conversions — appealing to the municipality that hosts the property — is familiar to developers. Seeve, also New Jersey chapter president of industry group NAIOP, said the level of cooperation "varies widely among towns" — some are "progressive" about attracting new residents and business, while others are simply too consumed with issues to fully understand land use.
Mack-Cali reportedly has met resistance to its proposal in Upper Saddle River. And in South Plainfield, borough officials are reluctant to abandon a commercial use at the former Motorola property, citing a multifamily project's potential impact on traffic and the school system.
"Obviously, we'll sit down with the developer and talk out the different plans," Mayor Matthew Anesh said. "But our inclination would be to have it stay in some kind of business office park or flexible warehouse space use."