Major cities offer incentives to address both empty buildings and housing shortages
Record-high office vacancies across the United States are creating new opportunities for adaptive reuse, as building owners and city officials look to office-to-residential conversions to combat a growing housing shortage and revive underused commercial real estate.
The national office vacancy rate stood at 19.4% in May, up 160 basis points from a year ago, according to CommercialEdge’s latest office market report. Over 149 million square feet of office space is now proposed for conversion, with 125 million of those proposals emerging since 2022 and a record 48 million square feet suggested for conversion in 2024 alone.
“Yet, there is no ‘one size fits all’ solution for converting a vacant office,” the report noted, explaining that the best candidates for adaptive reuse vary with market conditions and building specifics. Yardi’s Conversion Feasibility Index (CFI) helps identify sites with the most potential, scoring buildings as Tier I (top candidates for conversion) or Tier II (strong potential with some needed adjustments).
Cities push for conversions
Manhattan remains one of the nation’s most densely occupied office markets, but even there, the conversion trend is gaining momentum. Roughly 23 million square feet of Manhattan office space is currently proposed for conversion.
Yardi’s data show that 19.5% of Manhattan’s office stock qualifies as Tier I for conversion, with another 34.6% as Tier II. To encourage adaptive reuse, New York City has launched the Office Conversion Accelerator program, streamlining zoning and permitting for owners.
Notably, GFP Real Estate’s 222 Broadway, built in 1961, began construction last month to convert 770,416 square feet of offices into 798 apartments and commercial space, with completion expected by May 2027.
“With the destruction of office values being realized, it now is up to cities to incentivize conversions to maximize potential, or at the very least, reduce the red tape and regulations that make an already difficult project even harder,” CommercialEdge director Peter Kolaczynski said in the report.
San Francisco, facing one of the highest vacancy rates at 28.4% and downtown office attendance still below half of pre-pandemic levels, is also moving to boost conversions.
Despite only 1 million square feet of proposed conversions, the city is ramping up incentives, including tax waivers, fee removals, and a new downtown revitalization financing district. Projects like the New Humboldt Residences at 785 Market Street are already underway, transforming office space into 120 housing units.
Listing and vacancy rates
The national average full-service listing rate in May was $33.15 per square foot, down slightly from the prior month but up 4.8% year-over-year. Despite some high-profile leases and optimism from the AI sector, office utilization rates remain flat and job growth in office-using sectors is weak, suggesting vacancies may persist for some time.
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San Francisco’s vacancy rate has jumped 330 basis points in the past year, reaching 28.4% in May, while the Bay Area as a whole saw a 510-basis-point rise to 25%.
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