The Conversion Underwriting Playbook: What 25 Water Street Teaches CRE About Turning Distressed Office Into Housing

The largest completed office-to-residential conversion in United States history started as a building almost no one wanted. A 1968 tower in Lower Manhattan’s Financial District, 1.1 million square feet of deep floor plates and stingy brick-clad windows, sat vacant and traded at a steep discount. Ten years ago, most developers would have written it off as unconvertible: too big, too deep, too much area to modify for the numbers to ever pencil. Instead, it became SoMA, a 1,320-unit residential tower that surpassed the 566-condominium redevelopment of One Wall Street to claim the title of the largest such conversion in the country by unit count.

The architect behind that transformation, Eugene Flotteron, AIA, Principal and Director of Architecture at CetraRuddy, joined Gordon Lamphere on The Real Finds Podcast to walk through exactly how a deal like that gets underwritten and built. For practitioners watching distressed office trade across Chicagoland and the broader Midwest, the conversation is less a profile of one marquee project than a working checklist: what makes a building a candidate, where the value actually hides, and where the economics quietly flip from advantage to liability. This is that playbook.

Start With the Question That Kills Most Deals: Is It Overbuilt?

According to Flotteron, the first thing he checks when a developer calls about a building is whether it is overbuilt relative to what current zoning would permit for residential use. Many older office towers carry far more floor area than you could ever entitle on the same site today. In New York, residential use was historically capped well below the FAR allowed for commercial product, which means a converted office building can legally contain a volume of housing that would be impossible to construct from the ground up. Flotteron noted he has converted buildings at 21 and 24 FAR and is working on one at 30 FAR, densities no new residential project could approach.

The practical takeaway for any investor screening assets: an overbuilt building is not a problem to solve, it is the entire opportunity. The existing structure is a grandfathered entitlement. If you can reuse it, you capture density the zoning code would never grant a new building, and that delta is where conversion value is created.

Vacancy Is the Asset, Not the Liability

Conventional underwriting treats a vacant office building as distressed. In the conversion playbook, full vacancy is one of the most valuable conditions a building can have. As Flotteron explained, a clear path to vacancy is the single biggest complexity in any conversion. A single tenant locked into the middle of a floor plate for the next ten or fifteen years can make a project difficult to phase, even when it is not strictly impossible. An empty building removes that constraint entirely and lets the design team make aggressive structural moves.

At 25 Water Street, the team cut two full courtyards out of the building’s interior to bring light and air to the core, ripped open large portions of the facade, and added the lost area, plus more, back on top of the building. That degree of surgery is only feasible in an empty structure bought at a basis that can absorb it. The developers acquired the property out of distress, which is precisely what made such an ambitious reconfiguration financially rational.

The 80 Percent Efficiency Target and Where Value Hides

Flotteron described a recurring underwriting threshold among his developer clients: each residential floor needs to hit roughly 80 percent efficiency, the ratio of rentable area to gross floor area, or the deal does not work. Hitting that number on a deep office floor plate is the central design challenge, and getting there often means relocating stairs, removing surplus elevators, and cutting light wells through the building.

The most instructive part of the conversation was where Flotteron finds hidden value. Office buildings are loaded with infrastructure that residential use does not need. On one project, he found 20,000 square feet of additional sellable area simply by right-sizing the elevator core, replacing a bank of office elevators with a properly scaled scissor stair and the two elevators the residential program actually required. On another, an old elevator machine room held the most beautiful window in the building, a pointed arch the team converted into the most striking unit on site. Below grade, surplus cellar space that would be prohibitively expensive to build new became parking, a rare and valuable amenity in dense urban cores.

The lesson for investors evaluating a candidate: walk the building looking for what office use over-provisioned. Excess vertical transportation, oversized mechanical rooms, and unused below-grade area are not dead weight. They are recoverable square footage and amenity space that a ground-up project would have to pay full freight to create.

Building Era Is a Clue, Not a Rule

Asked whether a particular vintage of building converts more easily, Flotteron was clear that it is case by case, though certain patterns hold. Pre-war buildings tend to be shallower, smaller, and easier to work with. The hulking post-war and 1970s curtain-wall towers are larger and present a specific trap: many were designed on a five-foot office planning module that translates poorly to apartments. Two modules produce a living room under ten feet wide, too narrow to be comfortable, while three modules run fifteen feet wide, too generous for an efficient unit and prone to creating apartments that stretch fifty feet deep. Solvable, in his experience, but only with careful planning that aligns the layout to the column grid.

Punched-window buildings with generous glazing convert more readily than curtain-wall towers with minimal openings. The broader point stands: Flotteron’s view is that almost nothing is impossible to convert architecturally. The real question is always whether the required modifications still leave the deal financially viable, or whether you have modified the building so heavily that conversion ends up slower and more expensive than new construction.

The Unit That Beats the One-Bedroom Comp

The demand-side innovation in the current wave is what Flotteron calls the studio home office. New York rules let a converted building dedicate up to half of an apartment to home office space, which lets the design team take a unit from roughly thirty feet deep to fifty feet deep and add a second interior room. The result competes directly with a one-bedroom in the market, at a meaningfully lower rent. Flotteron described targeting studio home offices under 600 square feet that lease for $500 to $600 a month less than the comparable one-bedroom. The interior room lacks a window, but for the young professional moving into the city, the math is compelling.

Equally important is what the renter is buying beyond the unit. At 25 Water Street, the building delivers roughly 100,000 square feet of amenities, including indoor and outdoor pools, pickleball and basketball courts, a bowling alley, wellness space, and coworking areas, much of it carved from found space the developer would never build new. As Flotteron put it, the pitch is not 400 square feet of apartment, it is access to 100,000 square feet of amenities. The amenity arms race is back, and in a conversion it is funded substantially by space that already exists.

Incentives and Approvals Decide Whether the Wave Reaches Your Market

The financing structure that turned 25 Water Street’s market-rate plan into a mixed-income building was New York’s 467-M tax incentive. Flotteron noted the program let the project qualify for a 25 percent affordability requirement without changing a single floor plan, and that 25 Water Street was the first conversion to use it. He was equally direct that the 35-year abatement is set to step down to 30 years in mid-2026, which has produced a rush of developers racing to lock in approvals before the reduction, because five additional years of abatement is worth millions.

Beyond the abatement, New York’s City of Yes rezoning expanded which buildings qualify for conversion and made the framework citywide, which Flotteron likened to throwing gasoline on the adaptive reuse market. Just as important is speed of approval. He pointed to San Francisco’s struggles, where the absence of an as-of-right conversion process forces projects through special approvals that invite added affordability and construction demands and can kill a deal on timing alone. New York, by contrast, built a process aimed at clearing conversions in six months.

This is where the national picture, and the Midwest specifically, comes into focus. Flotteron has fielded calls on million-square-foot office buildings in Dallas, Houston, San Antonio, Washington, Pittsburgh, and Charlotte, and observed that markets outside New York generally lack the same absorption velocity, which pushes many of those deals toward mixed-use programs with a hotel or food-and-beverage component. He also flagged that the rest of the country needs to catch up on incentive programs, citing Chicago’s TIF approach by name as one of the tools cities are using to make the math work.

Chicago’s LaSalle Street Reimagined initiative is the clearest local expression of that strategy. The program offers Tax Increment Financing and other incentives to repurpose vacant Loop high-rises, with a requirement that at least 30 percent of units across the selected projects be affordable to households earning up to 60 percent of area median income. The first project broke ground in March 2025 at 79 W. Monroe, the historic Rector Building, converting seven floors into 117 mixed-income units with the support of $28 million in TIF. The trade-offs Chicago developers face, weaker absorption than Manhattan, heavier office tax assessments, and the need for substantial public subsidy to close the gap, are exactly the dynamics Flotteron described playing out in conversion markets nationwide. Investors tracking how these economics resolve will find a useful parallel in the residential conversion of 65 E. Wacker Place and what it signals for the broader Chicago office market.

Underwrite for Developer Speed

A final structural reality runs through the entire playbook: carrying cost. Because developers are financing a vacant building while they reposition it, the entire process is engineered for speed. Flotteron described overlapping design and construction in a way that would be unthinkable on a conventional project, issuing an early filing set within the first three months to start the change-of-use approval, running separate demolition, structural, elevator, and window-replacement packages so trades can begin while design development is still underway, and buying the mechanical systems package at the end of design development rather than at the end of construction documents. The teams effectively race to stay ahead of construction crews who are building portions of the project before the later phases are fully designed.

For an investor, the implication is that conversion underwriting has to account for an aggressive, phased delivery model from day one. The buildings that work are the ones where basis, vacancy, and entitlement allow the design team to move fast enough to outrun the carry.

The Bottom Line for Conversion Candidates

Flotteron’s view is that the public-private partnership model, where a city contributes incentives and streamlined approvals while private capital delivers on time and on budget, is the most durable engine for this kind of redevelopment going forward. The conversion wave that started in New York is now spreading, and the markets that capture it will be the ones that pair distressed basis with workable incentives and fast, predictable approvals. The buildings that pencil are overbuilt, vacant, and structurally flexible enough to hit efficiency targets, and the value is found in the infrastructure office use left behind.

At Van Vlissingen and Co., Chicagoland’s oldest commercial real estate brokerage, founded in 1879, our team helps owners and investors run exactly this analysis, from feasibility through execution, on office and industrial assets across the Chicago region and the Midwest. If you are weighing whether a distressed office building is a conversion candidate, or how the LaSalle Street Reimagined incentives might change the math on an asset you are evaluating, we would welcome the conversation.