Office Supply Turns Negative As Conversions Surge

Once considered a Hail Mary-solve for empty office towers, residential conversions are expected to hit such a fever pitch this year as to topple a 25-year trend.

The U.S. is projected to cut more office space than it will deliver for the first time since 2000, according to a recent CBRE report that pegs the sea change to the conversion surge.

Across 58 markets, a total of 23.3 million square feet will be converted or demolished in 2025. Last year, less than 20 million square feet were slated for change. Meanwhile, 12.7 million square feet of new office space will come online, compared to over 25 million in 2024, according to CBRE.

Legislative changes have driven that shift.

Take Manhattan, which leads the pack nationally with 10.3 million square feet planned or underway.

Last year’s City of Yes for Housing Opportunity opened the floodgates for conversions. Previously, buildings constructed after 1961, apart from those in Lower Manhattan, were ineligible. Now, anything that went up before 1991 is fair game.

A tax break ushered in by Gov. Kathy Hochul has also proved a boon. Developers who set aside 25 percent of a conversion’s units as affordable to those making 80 percent of the area median income can nab a 90 percent off coupon on property taxes.

The so-called Conversion King of New York, Metro Loft’s Nathan Berman, said the abatement, 467m, made his conversion of the former Pfizer Building, the largest project filing of last year, possible.

Speaking in December, he guessed it would spur others, too. Sure enough late last month, the city announced RXR Realty, SL Green Realty and Apollo Global Management would convert 5 Times Square into 1,250 rentals with the help of the governor’s tax incentive.

Washington, D.C., which passed its own tax incentive in January, is expected to see nearly as much conversion activity as Manhattan at 9.2 million square feet. The district’s so-called “Office to Anything” program offers a 15-year tax freeze for conversions of office buildings into non-residential uses — retail, hotels and restaurants.

And Cleveland boasts the highest share of office properties undergoing conversion, at 8.2 percent. The city has decades of experience redeveloping underused space, particularly after the Great Recession laid waste to its financial district.

“I like to say we were good at conversions before it became cool,” a local financing consultant, Ryan Sommers, told CBRE’s senior economic advisor during a podcast last fall and News 5 Cleveland recently reported.

Meanwhile, office deliveries nationally are slated to reach their lowest level in at least seven years, according to CBRE.

Cities such as San Francisco and Chicago have seen next to no new starts. San Francisco has one spec project underway, a Related California tower at 530 Sansome Street. Completion is slated for year-end 2025 and the building is fully available for lease, a recent Colliers report found.

In the Windy City, two spec developments totaling 513,000 square feet are in the works — 212 N Peoria Street, which broke ground in the first quarter, and 919 W. Fulton Market. They are just 8.9 percent pre-leased, according to Colliers.

But that’s not to say no one is building new office buildings.

Heading back to Manhattan: After office project pipelines dried up in 2024, the market for new buildings has seen a comeback.

Trophy towers are particularly in vogue.

Rudin Management is demoing the 24-story 415 Madison Avenue to make way for a 40-story replacement. JPMorgan Chase, which demanded workers return to office five days a week in January, is slated to deliver its new headquarters at 270 Park Avenue this year. And Tishman Speyer’s The Spiral, a snaking building in Hudson Yards, has proved popular with tenants since it opened in 2023.