A Buckling Skyscraper Shakes Confidence In Office Conversions

0:05Something sudden and potentially very scary happened in New York City on Tuesday morning. People were worried that a skyscraper might fall down. It happened at 235 East 42nd Street, in an extremely dense area of Manhattan. This building is right near the Chrysler Building, right near Grand Central Terminal. Our colleague Peter Grant covers commercial real estate. People saw from the outside that the building seemed to buckle. And that's a very serious situation. It could lead to a collapse. It all started with a report of bricks early Tuesday morning falling from a 37-story high-rise under construction.

0:47Video from construction workers 21 floors up showing steel bending inside the building. This prompted officials to evacuate nearby buildings. I've been in construction 21 years and I've never seen a beam bent in half. A lot of disruption in this area, which is particularly busy here in midtown Manhattan. And so immediately, once people saw this and notified the authorities, the fire department, the building department, they realized how serious the situation could become, and they sprang into action. Very quickly, the surrounding streets were blocked off. Everything from a school to a hotel to the Israeli consulate were evacuated.

1:24It is a little unnerving knowing that there's a building that is at risk of falling down so close to us. The greatest fear is a collapse, which could be a calamity. It could cause an enormous amount of lost lives and injury and property damage. Peter's been looking at this building since long before it began buckling. Because it represents a bigger real estate trend. One that's trying to solve America's housing crisis by converting empty skyscrapers into apartments. This is a very high-profile project, and we've been very closely covering the conversion trend, and this is the biggest conversion in the country, so it certainly caught my attention.

2:09Why should anybody who doesn't work or live on this block care about what's happening to this building? Well, as we've been reporting, the conversion trend is a very important piece of what's happening in downtowns throughout the country, especially New York. It's a big issue, and the project at the Pfizer building was in some ways pushing the envelope architecturally and in terms of size. And so everybody who's in this business is noticing.

2:45Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Thursday, July 9th.

2:58Coming up on the show, could a partially collapsed skyscraper set back a promising solution to America's housing crisis?

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4:18Introduce us to this building. What's the backstory behind this skyscraper? The building used to be the headquarters of Pfizer. It's actually not one building. It's two buildings. It's a huge structure. The two buildings combined are about 1.2 million square feet. It was not the most dramatic or noteworthy office building in the city, but it was a very large building that took up an enormous amount of space. And Pfizer, like a lot of other big corporations, decided they wanted new space and they moved out. And once Pfizer moved out, the building ran into the same situation that are facing older buildings throughout the country.

4:58Nobody wanted to move in. And so people needed to figure out what to do with it. Was it pretty much empty? It was, yeah. It was pretty much empty. The developer who bought this building is probably the best-known converter in the U.S. The name of the company is Metroloft. It was founded by a man named Nathan Berman way back in 1997. And this company has done more conversions than any other and have been pretty successful. Why convert office buildings into residential properties? What's sort of like the opportunity here? Well, first of all, the opportunity is that the building doesn't really have any other function.

5:42It can't be used as an office building anymore. The demand isn't there. Meanwhile, there's a housing crisis. So when you look at the fact that this is an obsolete office building and there's a desperate need for housing, in a way it seems obvious. Seems like a no-brainer almost, right? It does seem like a no-brainer. But once you get into the detail, it becomes a lot more complicated. It's complicated and really expensive because you can't just throw up some walls and turn an office into apartments. You have to completely transform the building.

6:19Think about an office building and how it's designed and how the floors are laid out and how the needs are going to be a lot different if you put apartments in there. I mean, a lot of the office buildings have these huge floors where if your desk is in the middle of the floor... An unfortunate soul. Yes. You're far away from a window. You're far away from light and air. And when you build apartments, you can't do that. The city doesn't allow you to do that. You can't put an apartment unit essentially in the center of the building that has no windows. Or you can't even have an apartment that has a limited number of windows.

6:57So you've got a big problem there to begin with. And then you also have the fact that in an average office floor, you don't have 15 kitchens and 15 bathrooms. And so those also need to be put in. But the major issue does have to do with light and air and the design of the buildings. Another major roadblock for these conversions was buying the buildings themselves. Office towers, even ones with low vacancy, have historically been pretty expensive. But recently, prices have nosedived. After the pandemic hit, office buildings emptied out and stayed empty for years. The office market cratered, and empty skyscrapers became affordable.

7:40Converters are saying, hey, I could buy these buildings now and convert them into residential, when in the past, because the buildings were so expensive, that wasn't really an option. Around the country, downtown landlords are trying to offload their buildings. There's one in Washington, D.C., where someone bought a building for, one million square foot building for only$25 million. Peter recently went to Denver, where a nearly 800 ,000 square foot downtown building sold for a song. Just to give you an idea of how inexpensive these buildings are, The developer that I profiled in the story bought a building for about$5 million.

8:24And when you think about it— It's a skyscraper for$5 million. Right, exactly. You can't even get a three-story brownstone in some areas of New York for that price. Well, that's exactly right. It's like, gee, do I want to buy this three-bedroom condo in New York or a 400 ,000-square-foot office building in downtown Denver? And how much would that building have cost, you know, 10 or 20 years ago? Like over$100 million easily. There's just no comparison. You're getting buildings for pennies on the dollar. Therefore, you've got a much bigger budget that you can spend on doing, on reconstructing it, reshaping it, chopping stuff down and building new sections.

9:00That's exactly right. How are local governments feeling about this trend? Do they like it or are they feeling skeptical? They're very much encouraging it. They see what's happening. when office buildings become obsolete. That's a big hit to the tax base, to the property tax base. It's a big hit to local businesses. It makes a city less vibrant, more quiet, more prone to crime and other problems. And so cities are very amped up about supporting this trend, not just with changing regulations and zoning, but some cities are providing subsidies to help the developers pencil these projects. out.

9:45Metroloft had big dreams for the conversion it wanted to do at 235 East 42nd Street. Well, their vision was for it to become the largest conversion in the country. In their plan, they were going to add that space in two ways, building a tower on one section of the building. And then on the main building, they were going to extend floors. Visually, you had the original complex, two buildings. And on one of the buildings in the complex, they were going to add 20 stories. On the other building, they were going to take floors near the top of the building that sort of tapered off kind of like a wedding cake and extend those floors.

10:30So instead of tapering off like a wedding cake, it was going to go become like a full-on skyscraper. It was going straight up and down. Exactly. They also planned to put a swimming pool on the roof. And they weren't just trying to convert this in such a way that it met these sort of light and air requirements. It sounds like they were also trying to make this a really nice building with a lot of amenities that would be sort of high-end. Yes, high-end amenities, but also they were doing a lot of these extensions to add more space. The more space you add, the more apartments you can sell or rent.

11:04All in all, the conversion would add roughly 200 ,000 square feet of new space to the building. But expanding floors and adding so many new ones would inevitably make the whole structure a lot more top-heavy. How ambitious was this building overhaul compared to others? Adding space and adding towers to buildings is not necessarily a new thing. People have been doing it with office buildings and residential buildings for a long time. A lot of buildings are designed so that you can add to the top in the future. So that in itself is not pushing the envelope. What was more ambitious here is the scale, but in no way is this sort of rocket science or doing something that's never been done architecturally.

11:52This can be done. And yet, partway through construction, those steel beams on the 21st floor started to buckle. This was very basic. what appears to have gone wrong. What we know about the problems at 235 East 42nd Street, that's next.

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13:27Metroloft was planning to expand the top 15 floors of one of the complex's two buildings. The one that Peter described is shaped like a wedding cake. That is where the two steel columns started to buckle. Fire officials said that several floors were also sagging. When these buildings are built, when you think about as you go higher and higher, The support columns at the top of the building are not as strong as the ones at the bottom of the building. And there's nothing wrong with that. Obviously, they're not holding that much weight. But if you start putting weight on top of those support columns at the top of the building, you need to reinforce them.

14:08You need to shore them up. you need to make sure that these columns that were designed to hold a certain amount of weight can't hold all this additional weight that you're putting on them. In fact, the developer told me that that appears to be what happened. The additional weight of the addition, of the horizontal extension, put pressure on these support columns, and two of them buckled. Berman added that he didn't know why only two columns seemed to have been affected, but not any of the others. He said that 95 % of the building was structurally sound. Berman and city officials have said there was little chance that the entire building would have collapsed.

14:46City officials also say the building is now, quote, safe and stable. Does anyone have a sense right now of who is responsible? What I'm hearing more and more is that the failure was partly in the inspection. In other words, people should have caught this. This is basic construction 101. That's not only on the structural engineers and the architects and the developer. That's on the people that inspect this work. And so I think that's going to be part of the investigation. Who was supposed to have caught this? Will they be able to fix it? I think so. I mean, they're able to fix a lot of problems that have been worse than this, but it will probably cost a lot of money and could very well delay the project.

15:39It's just going to require a lot of cash.

15:46The Wall Street Journal has reported that after this incident at the former Pfizer building, investors and lenders are feeling wary and are reconsidering their commitments to complex redevelopment projects. The city says it will conduct a detailed review of the construction plans for the Pfizer building and work won't resume until it's deemed safe. I do think this raises questions when developers start getting creative and maybe a little bit too clever in trying to add space or bring light and air into the building. But given what's just happened, those projects are going to be under so much scrutiny that I think they'll also go ahead.

16:25But after they get maybe two or three layers of inspection and review instead of one. How long do you think this office to residential conversion trend will last? Are we just at the beginning of this big movement, or are we nearing the end of it? I think we're at the beginning. Right now in the U.S., over 90 ,000 units are in the pipeline, either on the drawing board or construction is actually going ahead. Also, if you go around to cities around the country, a lot of them are suffering badly from these obsolete buildings. Peter says he saw how bad this can get on his recent trip to Denver. The financial district is completely hollowed out.

17:10There's no activity, no life. The vacancy rate is around 40%. There has to be conversions. You have to bring residential conversion to these areas. Otherwise, they're going to be turned into ghost towns. You're going to have a high-rise ghost town in the middle of cities throughout the country. And it's not just Denver. It's Dallas. It's Portland, Oregon. It's San Diego. It's downtown LA. Most cities are suffering enormous problems from vacant office space. And this is really the way to solve it. So I do think this trend will continue for quite some time. I mean, with everything that's just happened at this building, when this project is done, I wonder if anybody's actually going to want to live there.

17:58That's a good question. I kind of think that as the years pass and they might have to charge less, they might have to market it by bringing through a herd of elephants to show that can handle the weight. But I think once you have inspectors in there and the building departments in there and a lot of people taking a look at this, believe me, this is going to be under a lot of scrutiny. Once people give it the good housekeeping seal of approval, I think people will live there.

19:02Thanks for listening. See you tomorrow.