I don’t know for sure, but I imagine usable windows are required for living spaces.
But in this part of town, the advertising rights alone probably vastly exceed any possible revenue from renting the building for residential use. It’s kind of like the tiny building in Times Square that has the ball on top. I don’t think people even realize there’s a building behind all of the billboards, but it was original New York Times building.
Renting any part of that building out is likely not worth the hassle compared to the ad revenue, as you noted.
It was the second New York Times building! The original was on Park Row.
My first instinct was perhaps they raised the ceiling in the first floor to occupy some of the second. But thinking on it more, high ceilings without windows to go with them usually don't make the space feel that much bigger. You can spend up to a couple feet on crown molding but beyond that you're well into diminishing returns.
Some other buildings in Times Square keep several floors empty to use for signage instead, a minimum of which is actually mandated by the city.
I can think of buildings in other cities in seemingly premium real estate, including the Chicago Loop, that are notably underutilized.
Old, cramped upstairs spaces in crowded, touristy commercial districts just aren’t that useful. A small business would rather just get an office in WeWork.
Converting to housing is going to be expensive and probably also not worth it. Tourist lodging might work, but the licensing can also be an issue and tourists can be weird — no matter how much you tell people a place like that is noisy and on one of the busiest corners in the world, you’ll get reviews complaining about the noise and chaos.
Though I have replaced pepper control arms on a vintage Mustang once. Rust does that.