New York City’s Class B and C Office Recovery Is Real — and Accelerating

For several years, the narrative surrounding New York City office buildings, particularly Class B and Class C assets, was relentlessly negative. The headlines were dominated by remote work, shrinking footprints, weak leasing demand, rising vacancy and the notion that traditional office use might never fully recover. 

Many owners felt trapped. Buyers stayed on the sidelines. 

Lenders became cautious, and some even abandoned the asset class. Values declined sharply, and in some cases dramatically. It became fashionable to suggest that older office buildings in Manhattan had entered a permanent state of obsolescence. 

As is often the case in New York real estate, that consensus is now proving to be wrong.

At the low point of the cycle, many of the same Class B and C office buildings that had traded 10 years earlier for $800 to $900 per square foot were selling in the high $100s per square foot. That kind of reset was stunning. It reflected not only diminished income expectations, but also fear — fear of continued vacancy, fear of capital expenditure requirements, fear of changing tenant preferences, and fear that the city’s office market had fundamentally, and permanently, changed for the worse. 

When fear becomes the dominant market force, pricing often overshoots to the downside. That is exactly what occurred. 

Today, however, the landscape looks very different. It is increasingly difficult to find office assets trading in the $200-per-square-foot range, and even opportunities in the $300s are rare. That movement is not theoretical. It is happening in real time, transaction by transaction, as buyers recognize that the bottom of the market is well behind us. Those waiting for one more leg down are encountering a lesson that repeats itself in every cycle: By the time the bottom is obvious, it is already gone.

One of the most important drivers of this recovery has been the extraordinary impact of the 467m tax abatement program, which has materially accelerated office-to-residential conversions. The program has proved so compelling that Manhattan now has 84 office conversion projects underway, totaling approximately 25.7 million square feet. 

That is an enormous amount of obsolete or underperforming office inventory being removed from the competitive supply pool. When supply is reduced at that scale, vacancy pressure eases, availability tightens, and surviving office product becomes more valuable. This is Economics 101, but magnified by New York City scale.

The importance of those conversions cannot be overstated. For years, many older office buildings suffered from a mismatch between product and demand. Some floor plates were inefficient. Some systems were outdated. Some locations were better suited for residential use than office use. The 467m program created a rational economic pathway to reposition many of those assets into housing, where demand remains substantial. 

In doing so, it not only helped address the city’s housing shortage but also strengthened the remaining office market by shrinking excess supply.

At the same time, leasing activity has returned with far more strength than many anticipated. We are now seeing not only a healthy volume of lease signings, but also upward pressure on rental rates in many segments of the market. Tenants who delayed decisions for years are now making them. Companies that downsized too aggressively are recalibrating. Others continue to prioritize in-person collaboration, culture building, training and client-facing presence. 

The result is that quality office space — particularly well-located, well-operated, efficiently priced product — is becoming harder to secure.

An especially telling sign of the market’s improvement is that some buildings acquired for residential conversion are now being reconsidered as office assets and upgraded to remain office. That is a remarkable shift. It means that, in certain cases, the economics of continued office use have improved enough to compete with conversion alternatives. Markets send signals through capital allocation, and that signal is clear: Office value is recovering faster than many expected.

This should also serve as another reminder of something longtime New Yorkers understand well: Betting against New York City has historically been a losing strategy. Time and again, the city has been declared finished — after fiscal crises, crime waves, terrorism, recessions, financial shocks and now a pandemic. Yet it continues to reinvent itself because people still want to live here, work here, build businesses here, and participate in the unmatched energy that only New York can provide.

As long as ambitious people continue to come to New York City, demand for workspace will exist. It may evolve. It may modernize. It may distribute differently across asset classes. But it will not disappear. That reality is now being reflected in pricing, leasing and investor sentiment.

For owners of Class B and C office buildings, the message is encouraging. For investors, the message is urgent. If you are waiting for the market to bottom before acting, you are likely too late. That is always how bottoms work. You never know you were there until you are well past it.

And, in New York City’s office market, we are well past it now.

Robert Knakal is founder, chairman and CEO of BK Real Estate Advisors.