O
ver the past four years, Manhattan's office inventory has shrunk by more than 6.5 million square feet, with most of these spaces slated for conversion into residential units. This trend is contributing to a decline in availability rates in Manhattan, according to recent reports from CBRE and Colliers. Midtown experienced its highest level of positive absorption since 2005 in the third quarter, partly due to anticipated conversions, while Downtown has seen three consecutive quarters of positive absorption despite sluggish leasing activity.

    Office-to-residential conversions have been gaining momentum since 2021, with Franklin Wallach of Colliers noting that they are accelerating at a faster rate each year. In 2022 and 2023, over 3 million square feet were converted annually, and this pace is expected to continue in 2024. With approximately 93 million square feet of office space remaining available in Manhattan, companies are downsizing their footprints, leaving behind a surplus of aging office buildings.

    However, there is a shortage of housing in New York City, making conversions a welcome solution. CBRE's Adam Foster suggests that recycling old inventory can help address the city's undersupply of new construction and modernized office buildings. Ambitious projects like the Flatiron Building conversion and Related's plans for 625 Madison Avenue are contributing to this trend.

    As leases expire on buildings slated for conversion, available space does not hit the market, allowing owners to anticipate sales without renewing or halting leasing campaigns. While conversions have traditionally occurred in downtown neighborhoods, they are now spreading throughout Manhattan, including stodgy Midtown areas like SL Green's plans for 750 Third Avenue.

    Experts predict that conversions will continue to accelerate, particularly if the Adams administration's zoning initiatives and housing policies succeed. Colliers' Michael Cohen expects creative approaches to emerge over the next few years, potentially leading to tens of millions of square feet in conversions.