Priced out: How cities are scrambling to re-envision empty office spaces as future homes

This month, ABC's daily podcast "Start Here" is examining how a turbulent real estate market is upending many American communities. In this "Priced Out" series, we take a look at how cities are dealing with a growing dilemma: What to do with all of the empty office space.

As rising real estate prices have been reshaping homeownership across the country, the commercial landscape has also been going through a drastic shift, particularly in New York City.

Once packed with glass high rises filled with floors of cubicles for big-name financial institutions, tech start-ups, and other Fortune 500 companies, the city's Financial District is now re-envisioning itself as more welcoming to residences, as hybrid work and a shift in commercial real estate preferences have left many properties empty.

This scene is becoming a common one in other metropolitan areas such as San Fransico, Washington D.C., and Chicago not only for the changing work landscape but also because of recent commercial real estate trends that are forcing commercial landlords to reconsider their land holdings.

This has resulted in a solution that some experts say will be more common throughout the country: converting those office spaces into residential apartments.

For some cities, this is not a new phenomenon.

In the wake of 9-11, New York began rezoning more properties in the Financial District, which realtors rebranded as "FiDi" to attract new residents. But experts say there has been a bigger push since the pandemic ended.

John Cetra, a well-known New York architect, is currently working on a plan to convert 55 Broad St., which once housed Goldman Sachs, into nearly 600 market-rate apartments as part of a $172 million development deal that was approved in July.

Nearby, he's also converting an office building that once housed J. P. Morgan Chase into a 1,300-apartment building.

"What we're seeing now is this kind of acceleration of these buildings from the 50s, 60s, and 70s that are, that are being converted," Cetra told "Start Here" during a tour of the construction site.

Cetra said landowners are rushing to get people inside their properties because they are losing hundreds of millions of dollars a year from the lost rent that is typically used to pay for their mortgages.

Most developers obtain big loans to finance commercial properties and due to low interest rates, they would pay off their mortgage with another loan.

The recent rise in interest rates has forced commercial landowners to reconsider this strategy and the debt has been adding up and the rents to pay them down dwindling. Roughly $1.5 trillion in commercial real estate loans are coming due soon according to the finance analysis group Trepp.

Certa said there is a real chance that some big companies will default on their loans.

"They're looking at it and saying…it's not worth what we thought it was worth," he said of the companies. "They might walk away from some of these properties and say, 'I can't pay the debt service. So Mr. Banker, take it back.'"

Chuck Blozies, a San Francisco-based architect, told "Start Here" that his city, which has an office vacancy rate of nearly 40%, has seen a rise in commercial foreclosures.

That, in turn, can create what's known as a "doom loop": empty buildings lead to less tax revenue, which forces the city to cut back on public services. These cutbacks lead to the city being less attractive to businesses and workers, which leads to more vacancies.

"Of course, when the pandemic hit us, it was easy for [tech workers] to work from home," he said.

"I think the consensus is that office use, the way it used to be, is just never going to come back," he added.

Blozies has been leading several commercial to residential conversions in San Fransico and noted that it takes a lot of work to make it a livable space that complies with safety codes.

For example, typically many office rooms are deep within the floor plate and don't require windows for lighting and air, which is mandatory for an apartment. Blozies also pointed out how plumbing for commercial properties also presents architects with a problem.

"Office buildings have, typically, bathrooms ganged in the middle of the building. Residences have bathrooms all over the place. So you essentially need to take the building apart to do plumbing upgrades," he said.

Certa said New York City office towers, with huge floor plans and vast "dark spaces," present obstacles that forced his team to rethink traditional apartment layouts.

"Because of the size of the floor plates, the apartments get kind of long and narrow, but every apartment will have windows, and then they'll have home offices as well, plenty of closet space [and] everything that you'll need in an apartment," Certa said.

Bloizes said he is thinking outside of the box for ways to reuse the dark space in some of his design ideas, including a space where future self-driving cars can enter and exit the building.

"You need an elevator to get them up there, kind of drive in one side, get cleaned up and repaired on a conveyor belt kind of idea, and then drive out again to pick up their next fare," he said.

Although experts say the return on investments for the converted buildings is higher compared to an empty office building, there still is a major cost issue that trickles down to renters.

Due to the expensive nature of the conversion work, many of the apartments are listed as luxury units.

At the same time, neighborhoods that have seen commercial to residential conversions have also adapted. New York's Financial District, for example, has seen a growth in restaurants, shops, event venues, and other businesses that are now catering to the new population.

Some of the neighborhood's residents, like Stephanie Tronis, told "Start Here" they plan on staying there for a long time.

"It's quiet on the weekends. I love that. It's busy enough during the week that it feels like it's a neighborhood, but then on the weekends, it's, it's pretty quiet, which I enjoy," she said.