Only 14.8% of U.S. Office Stock Good Picks for Resi Conversion: Report

As more and more developers get their hands on office-to-residential conversions, a new report shows the trend might not be the best idea.

Less than one in six office buildings across the U.S. — or 1.25 billion square feet — are strong candidates for conversion, which is only 14.8 percent of the country’s total stock, according to CommercialEdge’s Conversion Feasibility Index, created by software company Yardi Systems.

Only 2.7 percent of those buildings were classified as “Tier I,” or showing “the most favorable characteristics” for conversion, while 12.1 percent were classified as “Tier II” and having “strong potential” for conversion, according to the report. The index analyzed buildings based on their characteristics, location and placement, along with architectural and environmental factors.

“With the continued destruction of office values and as we see an uptick in incentives at different levels of government, we believe the total pool for potential conversions into multifamily is larger than initially expected,” CommercialEdge Director Peter Kolaczynski said in a statement. “Not a cure-all by any means, but the 1.25 billion square feet identified isn’t insignificant.”

Spokespeople for CommercialEdge and Yardi did not immediately respond to requests for further comment.

But there’s some good news for landlords in the Big Apple. Manhattan led the pack with the most potential for these conversions nationwide, with 53.1 percent of its office buildings rated as either Tier I or Tier II candidates, the report found. San Francisco followed at 25.8 percent of buildings considered solid conversion candidates, with Los Angeles at 24.7 percent, Chicago at 18.6 percent, and Miami at 16.1 percent.

The report also found Manhattan led the nation in sales of office properties, with total transaction volume exceeding $2 billion in July, up from $1.4 billion in June. However, the sales price of Manhattan office space fell, averaging $439 per square foot in July, down from $588 in June — a one-month drop of 25.3 percent, although still the most expensive office space in the nation.

Local governments across the country have ramped up efforts to increase office-to-residential conversions as it becomes more and more clear that remote and hybrid work is becoming the norm and a plethora of office space isn’t as necessary as it once was.

One example of those government efforts is New York City’s Office Conversion Accelerator Program, which was launched in 2023 and supports owners interested in producing at least 50 residential units at potential conversion properties.

In the one year since the program began, 69 building owners have expressed interest in conversions, Commercial Observer previously reported. This comes after New York City saw 34 office-to-residential conversions between 2010 and 2020, according to the Department of City Planning.

And it’s not just New York City — a RentCafe report from January showed more than 55,000 office buildings across the U.S. undergoing residential conversions this year as the national vacancy rate in the office market spiked at 18.1 percent, according to CommercialEdge’s report.

Still, the number of buildings displaying favorable traits for conversion is dwindling. Many office buildings don’t have suitable layouts or windows that could easily transfer into residential space, Bisnow reported. 

And just because a building is ripe for conversion doesn’t mean it’s all sunshine after. The $250 million loan on Metro Loft Management’s office-to-residential project at 20 Broad Street hit special servicing this week and is likely to go into default, according to Kroll Bond Rating Agency.

That’s led to more developers choosing to just demolish the building altogether, with Williams Equities recently filing plans to take down the office tower at 655 Madison Avenue to likely replace it with “a mixture of retail, hospitality and residential,” Williams Managing Principal Michael Cohen previously told CO. 

Isabelle Durso can be reached at idurso@commercialobserver.com.