Office to Residence

Early this summer, the entrance to 160 Water Street, on the edge of Wall Street and the Financial District, was a mess of a construction site. Temporary plank walkways and tunnels had to be negotiated to the large glass and chrome revolving doors. Once inside, though, the mess gave way to a grand space, sleek and soaring: the entry lobby to Pearl House.

The building is a gem of New York’s most recent reinvention: converting hulking old offices, built for the 9-to-5 era, into high-amenity homes. These new apartments are designed not for Baby Boomer commuters but for their children and grandchildren, who not only want to work at home, they want to go to the gym at home as well.

Irilis Cedano, the concierge, says the experiment is working well. Unlike many New Yorkers who prefer older buildings and apartments with timeworn character, the residents who began moving into Pearl House late last year appreciate that everything is new and everyone is a newcomer, Cedeno says. “They’re building a sense of community.”

That same day, Alex Tendler, a vice president at Vanbarton Group, the developer of Pearl House and other luxury office-to-residential (OTR) projects, leads a walk-through of the building, with, among others, Jonathan Mechanic, chairman of the real estate practice at Fried, Frank, Harris, Shriver & Jacobson. Mechanic was not part of the legal team on the Pearl House conversion—though he and his 100-lawyer team have done dozens of other major property deals. He was on the tour as a matter of curiosity and courtesy. When he expressed an interest in seeing the nearly finished conversion, Vanbarton Group quickly agreed.

Lawyers prop up all the legs of commercial real estate in New York: what architects can design, what construction crews can build, and what makes financial sense for everybody. They work with brokers, bankers, developers, owners, architects, and of course buyers and sellers, and maneuver through and around the city’s ever-changing land use and zoning laws. They draft the terms and details of the contracts for transactions. They find tax breaks and subsidies.

Many lawyers see OTR conversions as a higher calling. By helping transform millions of feet of idle or underused offices into living spaces amid a desperate housing shortage, they are creating more places for people to live and work in what they regard as the greatest city on earth.

“This is very proactive for the city,” Mechanic says. “It’s huge.”

World events inevitably affect real estate markets. The “Black Monday” stock market crash and the 9/11 attacks both diminished the demand for office space—temporarily.

The COVID pandemic has had a larger and more lasting effect. Technology already made work-from-home feasible, and the pandemic simply supercharged the moment. Vacancy rates for office space doubled. Building owners are having difficulty collecting enough rent to pay their mortgages. Facing the prospect of forfeiting their buildings to lenders, some are selling at a loss.

At the same time, New York City’s perennial shortage of housing, especially affordable housing, has been getting worse. More low-income people need housing even as inflation and interest rates have boosted the average rent in Manhattan past $4,000 a month. More apartments are needed—half a million more by 2032, according to the Regional Plan Association.

The solution seems obvious: convert the unused office space into usable apartments.

And then the difficulties. Many office buildings are not suitable for such conversions for various reasons: financing, construction, and location, location, location. Plus OTRs need to survive New York City’s 1,300 pages of zoning regulations.

Cue the lawyers.

A real estate partner at Hogan Lovells, Ross Moskowitz is known for his way around those 1,300 pages. Before returning to private practice, he was executive vice president of New York City Economic Development Corporation, the official public-private partnership promoting the world’s ninth-largest economy. Now he represents investors, developers and nonprofits seeking discretionary land use and regulatory approvals before state and city agencies—including the New York City Planning Commission, the Board of Standards and Appeals and the Landmarks Preservation Commission.

He cites the inherent tensions in major commercial real estate. “Owners and developers have to take risks,” he says, “but institutional lenders are very risk-averse.” So he relies on his years in private-public economic development to help steer all parties toward the goal line and mutual objectives.

Moskowitz makes suggestions that clients had not considered, even for non-legal issues. “I see the deal before the deal,” he says. “I’m fortunate to be at the table as a strategic adviser as the transaction is contemplated.” He has found interpretations of zoning and land use laws that have allowed clients to, say, shift their plans to include a ground-floor arcade yielding retail rents, or a public plaza that took advantage of a provision allowing more residential floor space, and again, more rental income.

Sometimes he digs back into what city politicians and regulators were thinking—the land use and zoning equivalent of looking at legislative intent. “You go back to the bill, to the memos and the reports,” he says.

In the 1960s, urbanist Jane Jacobs likened the Financial District to a ghost town on evenings and weekends, when there was little or no street life. The city census counted only 833 residents in 1970. By 2018, thanks in part to OTR conversions, the FiDi population was estimated at more than 61,000. On the day of the Pearl House tour, Water Street was crowded with casually dressed pedestrians. People walked dogs and pushed baby strollers.

The new residential conversions in the Financial District, Moskowitz says, are helping to create the “15-minute neighborhood,” where work, errands and leisure needs can all be met quickly and easily. The pandemic, he notes, encouraged both state and city officials to revive previous programs that provided tax breaks for OTR conversions. “Government is laying the groundwork for these conversions to happen,” he says. “Government cannot afford to build them, but with tax incentives, private interests can.”

Daniel Bernstein’s early career as a union attorney representing maintenance workers has a nice symmetry with his work today: using government incentives to create affordable housing for such workers. A member at Rosenberg & Estis, he says the boom in OTR conversions means more to his firm than simply increased caseloads.

“It’s an opportunity to do well for the city and for ourselves,” Bernstein says. “It can make the difference between a failing office building and a successful rental building.”

Bernstein says building owners face tough choices with under-used, under-valued, under-performing office buildings. Keep trying to rent them as is? Unload them at fire-sale prices? Renovate them to more attractive, higher-rent “trophy” office buildings? Renovate them into apartments? “They need to know what they can do with their buildings by law,” Bernstein says. “Does it make economic sense? What are the highest and best uses of those offices? What can be done to help the bottom line?”

Bernstein and his firm act as a bridge not only between dueling business interests, but between business and government agencies. “Inevitably, when a law gets written, there will be some gray areas,” he says. “We open a dialogue with the city.” That dialogue is aimed at guiding officials to decisions favorable to his clients, he says. “The lawyer’s job is to make it work.”

Below-market rent and affordable-income formulations vary from neighborhood to neighborhood and building to building, but Bernstein says a building’s annual property bill can be lowered from 30% to 3% through government incentives.

“They try to benefit public and private interests at the same time,” Bernstein says. “It’s exciting to see the city reinvent itself.”

Inside Pearl House, the new lobby features a wide staircase spiraling around a golden pillar, along with dozens of couches and easy chairs. Past the fireplace, there’s a vending area where residents use fobs to unlock snacks, energy drinks, hair dryers, tampons and other necessities. There’s a rear entrance and service elevator for food deliveries, and a secure package room with tracking systems to make sure residents pick up the right packages.

Upstairs, the corridors feel like any new high-end rental. Ceilings, at a little under 10 feet, are lower than standard for new office buildings, but higher than many apartment buildings. Windows are all new; those within 75 feet of the ground have special glass to keep birds from flying into them. The old office windows didn’t open, but the new windows open about four inches, per zoning codes.

Major construction is often required for structural bracing and reinforcement, plumbing, insulation, electric and energy systems, fire safety and internet. Sometimes big shafts are carved down the middle of buildings to create enough windows. At Pearl House, three 26-story “voids”—empty spaces, one atop the other, floor after floor—allowed the architects to “reassign” windowless space to build four new floors on top with the most expensive apartments.

Peering into rooms and touching walls and counters, Mechanic says OTRs currently make up 25% of his workload. He adds that conversions offer attorneys opportunities for creativity—whether new interpretations of zoning laws or dealmaking compromises. He recently worked on a multifaceted transaction that bogged down when the seller wanted three times more than the buyer was willing to pay. Mechanic suggested a down payment with 90-day installments over the next three years. The parties agreed.

Mechanic sometimes takes over negotiations with entrenched tenants to get them to give up their leases so a building can be renovated. He sometimes steps in to negotiate disputes with construction contractors. “Those are not normal interactions a lawyer would be in,” he says. “But my clients want me to solve problems. You listen to them, what they need, then you do your best to fix it.”

“Jon Mechanic is a fantastically business-minded attorney,” says Woody Heller, a commercial real estate broker, also invited on the Pearl House tour. “Under Jon’s leadership, Fried Frank does more real estate transactions than any other firm. He’s incredibly responsive, quick and effective. He gets stuff done.”

The Pearl House tour peaks at the top floor. A two-bedroom, two-bathroom penthouse offers stunning skyline views through floor-to-ceiling glass. Out on the rooftop terrace, the panorama is breathtaking: from the East River and Brooklyn across New York Harbor and the Statue of Liberty.

Mechanic gazes across the scene with satisfaction, nodding and pointing at iconic towers he has worked on. That one is an OTR conversion. That one is condos for sale, finished to a higher standard than rentals. There’s the former AIG headquarters. This one has an excellent restaurant on the top floor. That one required tough negotiations with construction contractors.

He nods and smiles at another building as if greeting an old friend. “I’ve lived with that site for 30 years,” he says. “I’ve represented multiple people buying it, selling it, developing it, financing it. We are a full-service group. We are one-stop shopping. We’ve been in on a huge percent of major high profile deals happening in our part of the world over the past 20 years.” 

The Manhattan skyline affords Mechanic the greatest real-life trophy case a real estate attorney could have.

“My wife doesn’t let me drive in the city,” Mechanic confesses. “I get distracted looking at all the buildings we’ve touched, and talking about them. I can’t help myself.”