O
ffice conversions to apartments are sweeping the country, with 23.3 million square feet in the 58 largest US markets set to be converted or demolished by 2025, outpacing new office construction by a significant margin. In New York City, this trend is particularly pronounced, with CBRE estimating that if all current and proposed conversions were completed, it would remove around 16.5 million square feet from Manhattan's total inventory, a 3.9% reduction.
This phenomenon has several effects on the market. On one hand, it reduces vacancy rates, making the office market appear stronger. For owners of obsolete buildings, high conversion costs can be justified by increased property value. However, for tenants, the reduced supply means higher rents overall.
The conversion trend is gaining momentum, with projects underway or proposed in various areas of Manhattan. RXR, SL Green, and Apollo Global Management are converting 5 Times Square into 1,250 rental apartments, while Metro Loft Developers and David Werner Real Estate Investors are transforming the former Pfizer headquarters into 1,602 apartments.
In contrast, new office construction is lagging behind. While some projects are in various stages of development, few have secured tenants or broken ground. The only confirmed project on our radar is Related Companies' 70 Hudson Yards, a 1.1 million square-foot tower with Deloitte as the anchor tenant.
Other planned or proposed office projects face significant hurdles, including funding issues and regulatory delays. BXP's 343 Madison Ave. project remains stalled due to lack of tenants, while Vornado, Rudin, and Ken Griffin's 3 Hudson Boulevard is still in the land-use review process. The supertall 175 Park Ave. project, which includes the Grand Hyatt Hotel site, requires $4.84 billion in federal loans to move forward.
CBRE's data shows that recent conversions have removed around 15.5 million square feet of offices from the inventory, far exceeding the less than 2.5 million square feet of new office space added.
