Office Conversions Surge Amid Rising Vacancy Rates

• The national office vacancy rate was 19.4% in May, up 160 basis points year-over-year, with occupancy unlikely to rise in near future
• The average U.S. office listing rate was $33.15 per square foot in May, increasing 4.8% year-over-year
• Office construction pipeline continued to shrink, with 41.5 million square feet of office space currently under construction
• Los Angeles logged over $1 billion in office sales through May, though average sale prices declined more than 30% from 2022
• Austin recorded the second-highest vacancy rate in the nation at 26.7% in May while leading the South in office development with 2.7 million square feet underway
• Chicago remained the top investment market in the Midwest, with $794 million in office sales year-to-date, despite having the lowest average sale price among major U.S. markets ($59 per square foot)

Cities Push for Office Conversions

Record office vacancies are creating opportunities for building owners to repurpose vacant spaces and for cities to combat housing shortages.

The national vacancy rate remained high in May at 19.4%, a 160-basis point increase over the last year, according to our U.S. office market report. Currently, over 149 million square feet of office space is proposed for conversion, 125 million of which have been proposed since the start of 2022. Conversions proposals have grown every year this decade and 2024 saw 48 million square feet proposed.

Yet there is no “one size fits all” solution for converting a vacant office, with methods varying based on market conditions and project specifics. Yardi’s revamped Conversion Feasibility Index (CFI) scores buildings across a variety of factors, with a Tier I building being a top candidate for conversion and Tier II possessing strong potential but possibly requiring some modifications or adjustments.

Manhattan has one of the highest office occupancy rates in the nation, but its dense nature guarantees it won’t be long before vacant spaces will be eyed for other uses. Currently, 23 million square feet of office space in the city is proposed for conversion. According to the the CFI, 19.5% of Manhattan’s office stock is a Tier I candidate for conversion while 34.6% is Tier II. To expedite conversions, the city established the Office Conversion Accelerator program, which provides a single point of contact with the city government to assist owners with zoning and permitting. A GFP Real Estate property at 222 Broadway, originally built in 1961, started construction last month to convert 770,416 square feet of office space into 798 apartments and commercial space, anticipated to complete 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.”

Peter Kolaczynski, Director, CommercialEdge

San Francisco has one of the nation’s highest vacancy rates at 28.4% and office attendance averaging 43%, according to Kastle’s Back to Work Barometer. It is also one of the top markets in Yardi’s CFI with 9.2% of space rated as Tier I and 25.1% as Tier II. Despite these factors, there are currently only 1 million square feet of proposed conversions on the market.

San Francisco is looking to increase this number with its Commercial to Residential Adaptive Reuse Program, which includes tax waivers and fee removals. The city recently approved creating a downtown revitalization financing district, which will incentivize conversions by reinvesting the increase in property tax revenue to offset development costs. The New Humboldt Residences, a property located at 785 Market Street, is currently in the process of being converted into 120 units of housing.