How High, FiDi?

“In the next few years you are not going to see many conversion projects in the Financial District,” Michael Shvo, the ubiquitous and masterful real estate marketer, said.

Mr. Shvo was referencing the vanishing trend of converting hard-to-fill office towers into luxurious new condos in the Financial District—something that has been instrumental in transforming the once-forlorn area from an all-work-and-no-play business hub to a diversified neighborhood with an eclectic mix of 9-to-5 commuters, small businesses and round-the-clock residents.

The blossoming of the downtown area was hardly accidental, but rather the fruit of a well-executed policy program to replace the enclave’s superfluous and ancient commercial buildings with thousands upon thousands of new apartments.

According to the Alliance for Downtown New York, a business improvement district, the neighborhood has grown from what was once a small community of just over 13,500 full-time residents in 1990 to a beehive of approximately 57,000 inhabitants. Since 2004, there have been over 7,500 residential units, both condos and rentals, added to the neighborhood south of Chambers Street and east of Battery Park City through conversion (and several thousand more from new developments).

Many of the conversions were prodded by 421g tax abatements, specifically enacted to help re-purpose commercial space for residential use in the aftermath of the dot-com bubble and 9/11; it expired in 2006.

Through 2008, the pace of development has been swift, but it appears to be coming to a screeching halt. In the first nine months of 2008, 2,278 converted units have gone online in the area bounded to the north by Chambers, to the west by the West Side Highway and to the east and south by New York Harbor. There are only five conversion projects scheduled to open in 2009, according to statistics from the Downtown Alliance, with conversions at 67 Liberty Street, 24 Warren Street and 127 Fulton Street all adding less than 15 units each. The bulk of the big residential projects scheduled to open in 2009 and 2010 are almost all new developments, including a 189-unit building at 201 Pearl Street scheduled to open in 2009.

Mr. Shvo—who is marketing three Financial District developments, including 20 Pine The Collection and the W Hotel Downtown, a condo-hotel—attributes the slowdown to a confluence of three untimely circumstances: The cessation of the tax abatements and subsidies; the seizure of the credit markets; and the economic downturn, all of which have thrown the housing market into disarray.

The Financial District is firmly planted in its adolescent phase; it’s certainly changed, but the final product is still very much in doubt. Two incomplete and sputtering projects loom large over downtown Manhattan: the World Trade Center redevelopment, chronically behind schedule and already over budget; and the South Street Seaport redevelopment plan, which is having difficulty with government O.K.’s and has a developer, General Growth Properties, facing the unfriendly prospect of bankruptcy.

Indeed, once all projects already under way are completed, there is likely to be a prolonged stretch of inactivity in a neighborhood accustomed to a Dubai-like state of constant construction. The question, now, isn’t how far has the Financial District come, but rather, how far will it go? “The Financial District is beyond the point of no return,” Mr. Shvo said.

It’s a point boosted by Liz Berger, president of the Downtown Alliance and a longtime resident of the Financial District. According to Ms. Berger, the Financial District will continue to grow residentially in the years to come. “Whether developers will be able to take on ambitious projects anywhere is unclear, but I think that the residential market downtown is still very healthy and there is still lots of demand in Lower Manhattan.”

Mr. Shvo readily admits that business has tapered since last year, but he claims his properties are navigating the turbulent climate just fine; better, even, than other developments in the area.

“I wouldn’t be surprised if other buildings are suffering in Lower Manhattan, especially cookie-cutter buildings still in construction; those will have a hard time selling in today’s market,” Mr. Shvo said.

Projects that are still under construction or recently finished are likely to suffer in today’s dismal housing market. Even 20 Pine, Mr. Shvo’s high-class development, has had trouble selling its inventory (some units are now offered as rentals), while developer Kent Swig’s financing difficulties forced him to shut down all activity at top-notch condo conversion 25 Broad.

Before any talk of new developments, the Financial District has to beef up and fill out its frame. “Before there are any new buildings, the current inventory has to be absorbed,” Mr. Shvo said.

How High, FiDi?