NYC helps itself and property market with zoning plan, Walker & Dunlop CEO says

New York City's offices-to-housing conversion plan in midtown Manhattan offers a path to expand the supply of residential units, throws a potential lifeline to struggling landlords and helps stave off a crisis in municipal finances.

That's the assessment of Willy Walker, chief executive officer of Walker & Dunlop Inc., a commercial real estate financing firm with a focus on multifamily lending. It won't be easy, he said, but the work-from-home era has wrecked old assumptions about the need for office space, leaving an unprofitable glut in the market. 

"In New York and Boston and some other metro areas, there are mayors and city councils that realize that their tax revenue is going to decline precipitously unless they do something to enable the conversion of these buildings into functioning real estate," Walker said Wednesday in an interview with Bloomberg. "As a result of that, we finally do have some movement."

Walker offered his assessment of the effort taking shape in New York to create as many as 20,000 new housing units out of vacant offices. The plan envisions a multi-agency group to help developers cut through red tape and calls for rezoning a section of Manhattan known as Midtown South.

"It's going to take a lot of time," he said. "It's going to take a lot of capital."

There's a delicate balance at play: Few buildings are completely empty, he said, and in many cases tenants are reluctant to give up on their leases. "The process of buying out those leases is very expensive and often very difficult to do," Walker said.

At the same time, trends in the office market are ominous. Owners globally have been giving properties up to lenders because of dwindling demand for the types of downtown spaces that once commanded kingly leases. 

The run-up in 10-year Treasury yields past 4.3% "in the past two weeks has sort of added insult to injury," Walker said. "Many owner-operators are trying to figure out what their capital strategy is going forward given what many people are looking at as rates being higher for longer."

Walker & Dunlop isn't immune to the upheaval. The stock gained 5.5% this year through Tuesday, less than half of the advance in the S&P 500, and is coming off a 47% plunge in 2022, the worst annual performance since the company's 2010 initial public offering.

Aetos Capital Real Estate CEO Scott Kelley said earlier on Bloomberg Television that commercial property has been especially hard hit by the twin pressures of the work-from-home era and the growth of online shopping at the expense of brick-and-mortar retailers. With that caveat, he said, office valuations in some markets are attractive for pick-and-choose buyers.

"You can't just say everything's going to hell in a handbasket, so buy whatever," Kelley said. "You need to be very particular. And there are going to be a lot of broken projects that need significant development, redevelopment, repositioning, asset-management work, which is how we're positioning ourselves."