Fresh U.S. Office Conversion Fund Nears $1B in Investments

If you build it, they will come — unless it’s stale office space. 

In Manhattan, for example, the office vacancy rate hovers at a high of between 13 and 14 percent — nearly doubling the pre-pandemic levels of 2019 — while apartments come with sky-high rents and spark bidding wars, creating a perfect storm for a switch-up. 

According to recent Cushman & Wakefield data, the pace of New York’s office-to-residential conversions has probably never been faster (or at least it’s close to that milestone). 

Enter another major player intent on capitalizing on the trend. 

In April, developer Don Peebles of the Peebles Corporation and Doug McNeely, previously a partner at BlackRock and at Carlyle, announced the Donahue Douglas asset management firm: a $1.5 billion venture  to buy offices in New York and elsewhere in the U.S. to convert into housing or hospitality. 

Office-to-residential conversions are not a new phenomenon, but the national scale of Donahue Douglas marks a major shift from firms or funds focused on a single conversion project or one specific region. “Most of my entire career has been focused on developing cities,” said Peebles. “We’re not going to go to New York City or Washington, D.C., and buy one building; we’re committing to these markets.” 

Together, McNeely and Peebles plan to buy and transform office buildings across U.S. cities, including New York, Washington, D.C., Los Angeles and Boston. The fund could spur at least $4.5 billion in apartment redevelopment, creating roughly 15,000 housing units, said Peebles. 

Additionally, Donahue Douglas is launching an emerging developer fund, with hopes to eventually employ minority developers for office conversion projects.

“This is a long-term business for us,” said McNeely, “The secular headwinds that exist in office space right now, with structural shifts post-COVID, have created a real generational opportunity to invest in this space.”

Since the pandemic, thousands of vacated office buildings have undergone makeovers, transforming into much-needed housing complexes. The United States reported a lineup of 55,300 office-to-residential units last year, with some 70,700 conversions planned for 2025, according to Yardi Matrix data. 

In New York City, notable office-to-residential conversion projects include the historic Emmet Building at 95 Madison Avenue and the Financial District’s newly opened 25 Water Street, the country’s largest conversion of its kind. Outside of New York City, developers from Detroit to Boston are seeking new opportunities in old buildings. These opportunities have ripple effects. 

“Putting capital and repositioning these buildings either turns around a neighborhood or prevents the neighborhood from ever facing issues with dark and vacant buildings and storefronts,” said Jeremy Shell, a principal with New York-based developer TF Cornerstone (who is not involved in the new fund).

As of October, McNeely and Peebles were in the process of closing various commitments totaling nearly $1 billion of their planned $1.5 billion fund, said Peebles, who anticipates closing on that $1 billion by the first quarter of 2026. Different investors have jumped on board, including large institutions such as state pension plans, as well as family offices, university endowments and high-net-worth individuals. Many institutional investors want to allocate significant funds between $100 million to $200 million each, said Peebles.

Beyond any one investor, however, the fund has gained momentum by problem solving for the now. 

“In New York and many other markets, we have a housing crisis, and that is not only an affordable housing crisis — that is a general residential housing crisis,” said Shell.

While many New Yorkers can anecdotally understand housing complaints, the statistics hammer home the point. Nationally, there’s a shortage of some 7 million affordable housing units and 4.5 million market-rate ones. In New York specifically, there’s little ground-up construction of multifamily apartments. Moreover, building costs have increased alongside spiking interest rates, inflation concerns and tariff uncertainties, said Shell.

To address this staggering lag, state and local officials have enacted policies such as a major rezoning of Midtown South to incentivize office conversions, and a long-term property tax break known as 467-m. Such moves highlight a key player in pulling off large-scale office-to-residential conversions. 

“That’s really step one: the city getting behind creating or recreating these buildings,” said Andrew Barrocas, CEO of MNS Real Estate (who is also not involved in the Peebles-McNeely venture).

But policy alone is not enough to pull off nationwide conversion projects. Rather, a workforce tax credit program and financial incentives are crucial to producing more housing. Tax credit programs allow Peebles and McNeely to create a range of housing, from affordable to higher-end luxury apartments, depending on each building, said Peebles. 

Meanwhile, Congress earlier this year modified the federal Low-Income Housing Tax Credit program, making the production of affordable housing more attractive to developers, and tax credits easier for them to use.

The closure of all kinds of offices has exposed the potential for a fund like the one proposed by Peebles and McNeely. Empty offices in New York City have caused small businesses to shutter, while those in Downtown Washington, D.C., have created something of a ghost town, snowballing into vacant retail and the closure of small businesses. 

Washington, D.C., therefore tops the list of Donahue Douglas’ geographic points of interest, as the firm’s investment strategy focuses on large, major markets; strong, solid underlying fundamentals; significant distress; and entrepreneurial opportunities, said Peebles.

“No. 2, we really see San Francisco as an environment of great opportunity,” said Peebles, who pinpointed the city’s politics and focus on crime and quality of life issues. He additionally cited Dallas, Austin, South Florida and Boston as areas with major conversion potential.  

Replacing offices with apartments can revive neighborhoods and create more vibrant, vital, economically resilient and equitable places, said Dan Kaplan, a senior partner at architecture firm FXCollaborative. 

Across neighborhoods, Peebles and McNeely plan to purchase a combination of both healthy buildings and those under significant duress, said McNeely. Some of these offices will be more bare-bones buildings at the end of their physical and economic lives, while others will be newer skyscrapers that have lost their tenants.

Peebles doesn’t consider New York City among Donahue Douglas’ top five cities. But its neighborhoods still present opportunities for both conversions and ground-up development projects through Donahue Douglas’ emerging developer fund. 

“Our business strategy will be the real estate investment strategy of the future,” said Peebles. “The institutional investors and institutional developers have proven that they can never meet the needs of the public when it comes to housing. … There’s a demand for a new class of developers and investors, and capital to go to them.”

As for the New York City areas well positioned to benefit from office-to-residential changes?  Barrocas singled out business-heavy neighborhoods like Midtown East and Midtown West. Neighborhoods like the Financial District, Lower Manhattan and parts of Brooklyn are similarly prime for conversion projects.

In Midtown, the Garment District is likewise ripe for office-to-residential changes, said Kaplan. Not only is the area accessible to the subway, but it also has loft-type buildings that are relatively easy to transform into apartments. Sure, the neighborhood is missing green spaces, said Kaplan, but those residential aspects are likely to arise after housing arrives.

After all, “it’s faster to convert than it is to build new,” said Kaplan. Meaning, converting buildings can — and likely will — revive neighborhoods more efficiently than new construction. (Another bonus: Conversions are also the more sustainable option, as concrete and steel are major sources of embedded carbon.) 

For proof, take Manhattan’s Financial District circa the 1990s. Back then, the neighborhood was predominantly offices. After an early 2000s recession and the terrorist attacks in September 2001, the values of those office properties declined. Plus, city zoning reforms in the previous decade  — among tax incentives and lower-priced office buildings — spurred the conversion of larger offices, said Francis Greenburger, CEO and founder of Time Equities (and uninvolved in the Peebles-McNeely venture). 

“When you have vacant storefronts, vacant buildings, less pedestrian traffic around these buildings and neighborhoods, there’s risk of this downward spiral, and we’ve seen it,” said Shell, whose TF Cornerstone was responsible for various FiDi conversions. Once housing moved into the Financial District, so did shops, cafes and restaurants to feed and entertain those new residents. 

Neighborhood residents require everything from garbage pickup to quieter streets, as well as supermarkets, restaurants and cultural venues. “It takes a long time for the locations to provide the sort of infrastructure that residential tenants want,” said Greenburger, who believes the trend of conversions could potentially taper off within the next two to three years, once suitable office buildings are all scooped up. “Changing the office buildings isn’t the entire equation.”

Nor is doing away with workspaces altogether.

“As it pertains to New York City, we’re being very innovative,” said McNeely. “So, we’re going to couple conversions with smart working spaces. [We will] take 21st-century working spaces, where people are going to be very interested in not only living in the building, but also taking part in the neighborhood. We really want to focus on not only the building, but the amenities within and surrounding the building.”

Anna Staropoli can be reached at astaropoli@commercialobserver.com.