Interest in Office Conversions Grows Amid Rising Vacancies and Discounted Sales 

Key Takeaways: 

• More than 1.2 billion square feet of office buildings (14.8% of total stock) are quality residential conversion candidates, according to our new tool that scores office buildings based on feasibility for conversion to multifamily 
• While San Francisco and Los Angeles have over 20% of their existing stock as solid candidates for residential conversions, another six markets stand above the national average, including Chicago and Miami 
• Under-construction office space totaled 73.8 million square feet nationwide, representing 1.1% of existing stock 
• Office sales amounted to $17.1 billion through July, remaining flat compared year-ago figures, with assets trading at an average of $173 per square foot 
• Seattle’s construction pipeline shrank from 6.6 million square feet to 2 million square feet year-over-year 
• Austin’s vacancy rate was up by 240 basis points year-over-year to 22.9% in July 
• Manhattan led sales nationwide, with transactions exceeding the $2 billion mark through July 

Trends & Industry News

Top Office Buildings for Conversions 

As it has become increasingly clear that remote and hybrid work is here to stay, the interest in converting vacant offices into residential spaces has grown among building owners and policymakers. While conversion projects have remained somewhat niche, our new proprietary tool shows a larger pool of potential conversion targets than most may suspect. 

The Conversion Feasibility Index (CFI) is a new tool developed by CommercialEdge Research, the Yardi Commercial Data and Research department, that uses a weighted scoring system to evaluate the characteristics of buildings and determine their suitability for conversion. The CFI is a score assigned to each building based on various factors, including building age, location, total square footage, building depth, mid-block location, use type, number of stories, floor plate shape, ceiling height, green-building certifications, walkability and transit accessibility.  

Buildings’ scores are then categorized into three tiers: Tier I buildings are top candidates for conversion, Tier II buildings pose strong potential for conversion but may require some modifications or adjustments and Tier III buildings will face significant challenges and limitations. 

In total, more than 228.3 million square feet (2.7% of existing stock) of office space is classified as Tier I, with an additional 1 billion square feet (12.1% of stock) classified as Tier II. Most conversion candidates are located within CBD or urban submarkets, with only 6 million square feet of suburban office space classified as Tier I and 171.1 million square feet as Tier II.  

With the continued destruction of office values and as we see an uptick in incentives at different levels of government, we believe the total pool for potential conversions into multifamily is larger than initially expected. Not a cure-all by any means, but the 1.25 billion square feet identified isn’t insignificant.

Peter Kolaczynski, Director, CommercialEdge

Perhaps unsurprisingly, Manhattan has the largest share of its stock rated as conversion candidates, with 16.8% in Tier I and 36.3% in Tier II. While no other top market matches Manhattan in terms of space rated as strong conversion candidates, San Francisco (6.2% Tier I, 19.6% Tier II), Los Angeles (4.4% Tier I, 20.3% Tier II), Chicago (4.1% Tier I, 14.5% Tier II) and Miami (3.7% Tier I, 12.4% Tier II) also have significant amounts of office space with a higher potential for residential conversions. 

Top Markets by Suitable Office Conversion Candidates 

Although the pool of potential conversions is large, many projects may have a tough time penciling out. Local governments across the country have been ramping up efforts to increase conversions. New York City’s Office Conversion Accelerator, which expedites zoning and permitting processes, has enrolled dozens of buildings so far. Washington, D.C.’s Office-to-Anything Program offers a 15-year tax freeze for eligible projects. San Francisco's Request For Interest is an initiative meant to identify projects where the City Council can accelerate the building conversions through regulatory changes, financial incentives or more. the City Council of Chicago offers generous subsidies to convert downtown offices into over 1,000 apartments.

Additionally, further value destruction could make more conversions economically feasible. The average sale price of an office has been down 40% since 2021, and more than a quarter of all buildings sold this year have been purchased at a discount compared to their prior sale price. 

Listing Rates and Vacancy

Vacancy Spikes Hit Even the Strongest Markets 

The national average full-service equivalent listing rate was $31.67 per square foot in July, our U.S. office market report notes, unchanged from the previous month.  

Class A and A+ office spaces posted average rental rates of $37.11 per square foot in July. Class B properties followed with $26.86 per square foot, while Class C space was at $20.41 per square foot. 

The national vacancy rate was 18.1%, an increase of 100 basis points year-over-year.  

Top Listings by Metro Area: July 2024 

U.S. office vacancy rates have been moving upward everywhere since the onset of the pandemic, even in Texas markets that have weathered the shift to remote and hybrid work better than most.  

Over the last year, Austin’s vacancy rate has risen by 240 basis points. This increase is partly due to the impact of new supply. Since the start of 2021, Austin’s stock has grown by 10.7%.  

For a while, markets such as Austin were propped up by strong employment growth in office-using sectors, but that appears to be over, with Austin experiencing a decrease of 0.3% year-over-year. 

Supply

Life Science Slowdown Impacts Major Hubs’ Pipeline 

Nationally, 73.8 million square feet of office space were under construction as of July, representing 1.1% of stock, according to our U.S. office market report. Construction starts have fallen over the last two years, and the under-construction pipeline has shrunk by more than 26 million square feet year-to-date. 

Office Space Under Construction (Million Sq. Ft.) 

A wave of venture capital funding hit the life sciences sector post-pandemic, but enthusiasm appears to have waned in recent quarters. This slowdown is reflected in the development of new lab space, which has significantly cooled this year after reaching historic highs in recent years. Life sciences accounted for more than a quarter of all construction starts in 2022 and 2023, but this figure has fallen to just 11% in 2024.  

The Boston market, by far the largest life science cluster in the nation, saw the most development activity from the life science boom. Many of these projects are still under construction, which is why Boston’s pipeline dwarfs that of any other market. This year, however, Boston has seen a mere 320,000 square feet break ground. 

Transactions

Share of Discounted Sales on the Rise This Year 

Across the U.S., a total of $17.1 billion in office sales have been recorded through the end of July, with properties trading at an average of $173 per square foot, our latest U.S. office market report shows.  

2024 Year-to-Date Sales (Millions) 

The share of discounted sales is on the rise. This year, 28% of all office buildings that sold traded for a lower price than their previous recorded sale, up from 18% of all office transactions last year. For example, a 29-story office building on Wall Street, Manhattan, the most expensive office market in the U.S., has sold for $116 million, 57% lower than its previous selling price of $270 million in August 2015. Earlier this year, a vacant 16-story office building in San Francisco sold for $6.5 million, a nearly 90% decrease from its $62 million price in 2016. 

With over $200 billion in loans maturing before the end of 2026 and the continued weak demand for space, our office real estate outlooks anticipate an upward trend in the share of such sales. 

Western Markets

Life Science Hubs Face New Headwinds 

San Francisco continued to lead the nation in vacant office space, with a 25.4% vacancy rate as of July, up 420 basis points year-over-year. Despite declining office occupancy rates, San Francisco remained the most expensive office market in the West, with an average listing rate of $61.38 per square foot, second only to Manhattan nationwide ($71.34 per square foot). However, this represents a 4.2% decline compared to year-ago figures.  

In response to the ongoing challenges, the potential for office-to-residential conversions emerges as a silver lining. According to our Conversion Feasibility Index, San Francisco ranks second among the leading U.S. office markets for spaces suitable for such repurposing, with 25.8% of its total stock qualifying as strong conversion candidates. To facilitate this, voters approved Measure C, a tax break for developers that convert up to 5 million square feet of commercial space by 2030. 

In terms of sales volume, the Bay Area led the region with over $1 billion in transactions as of July, a significant increase from the year-ago volume of $609 million. However, the average sale price in the Bay Area fell from $358 to $261 per square foot year-over-year. Los Angeles was the Western leader in sale prices, with office properties trading at an average of $430 per square foot, an 86% surge from the previous year’s $231 average. Only Manhattan ($439 per square foot) and Austin ($432) surpassed the Western market on a national level. 

West Regional Highlights 

Looking at new supply, Seattle saw the biggest slowdown in office construction in the West over the past year, with current projects totaling just 2.1 million square feet, significantly down from 6.6 million square feet in July 2023. Once a driving force behind the growth of the market’s pipeline, the life science sector is now grappling with an oversupply and diminished demand. 

The total net absorption of life science spaces dropped from 88,000 square feet in Q1 to 29,000 square feet in Q2, according to Bisnow. Two office lab spaces are expected to open this year: The Touchstone and Portman Holdings’ Chapter II building, and the LPC West and Intercontinental Real Estate Holdings’ space, with no leases signed so far. 

The San Francisco life science market faces the same challenges. A 600,000-square-foot project in the Golden City by Kilroy was recently delivered fully vacant. Another recently completed project, a 352,000-square-foot facility, is currently only 19% leased, Commercial Observer reported. Despite these headwinds, investors see long-term potential in the biotech sector and office real estate outlooks expect a market rebound once activity picks up.  

Midwestern Markets 

Chicago Takes Action to Revive Business District 

Asking rents continued the downward trend in the Midwest, with all leading office markets in the region ranking among the top five most affordable in the U.S. Detroit saw the lowest rate nationwide at $21.61 per square foot and led the Midwest in office vacancy with a 19.5% rate. Minneapolis-St. Paul posted the third-lowest listing rate nationwide at $24.91 per square foot, down 8.5% year-over-year.  

Meanwhile, Chicago’s average asking rates fell 1.0% year-over-year to $27.27 per square foot, the fifth lowest nationwide. Its vacancy rate was 19.1% in July, down 10 basis points from the previous month. Like many major U.S. cities, Chicago employs various strategies to revitalize its downtown business district, which was significantly affected by the pandemic. 

The City of Chicago has approved $150 million in TIF funds for redevelopment projects, focusing on revitalizing LaSalle Street and the Monroe Residences & Hotel by converting vacant office space into residential units. According to our Conversion Feasibility Index, 18.6% of Chicago’s office building stock are strong candidates for office-to-residential conversions, presenting significant development opportunities. 

Office property owners are also investing in upgrades, with the owner of Prudential Plaza office complex planning a $50 million renovation. The Thompson Center is being redeveloped and is expected to serve as Google’s new Chicago headquarters by 2026, aiming to bolster the city’s tech hub status.  

Midwest Regional Highlights 

Office development continued to dwindle in the Midwest, with leading markets in the region recording the smallest supply pipelines nationwide on a percentage-of-stock basis. Chicago had 831,144 million square feet underway, equal to 0.3% of existing stock, a sharp decline compared to its year-ago 2.3-million-square-foot pipeline. Meanwhile, Detroit’s (524,000 square feet) and the Twin Cities’ (435,666 square feet)pipelines accounted for just 0.4% of their respective inventories as of July. 

Office properties in all the top Midwestern markets were selling for prices below the $173 national average. The Twin Cities led the region with average sale prices of $134 per square foot, while Chicago and Detroit saw the second-lowest average sale prices nationwide at $92 per square foot. 

Southern Markets

Atlanta’s Office Pipeline Reaches New Low 

Among Southern markets, Atlanta stands out with one of the smallest supply pipelines at 1.8 million square feet, equal to 0.9% of existing stock. This marks a significant drop from year-ago figures when 3.4 million square feet of office space were underway.  

Since the start of 2024, four new office properties were completed in Atlanta, adding over 1 million square feet to the inventory, and six more properties are set for completion this year. With no construction starts so far in 2024, this marks the lowest office square footage under development in Atlanta since 2015, as reported by Connect CRE. Regarding office occupancy rates, Atlanta’s vacancy was 18.4%, while in terms of listing rates, the average asking rent stood at $32.02 per square foot. 

South Regional Highlights 

Among the nation’s top 25 office markets, Washington, D.C., recorded the second-largest sales volume with nearly $1.6 billion in office transactions through July, well above the year-ago volume of $889 million. The market also stands out with its potential for office-to-residential conversions: 14.3% of its office stock has been identified as strong candidates for adaptive reuse projects, according to our Conversion Feasibility Index. This is further supported by the city’s Office-to-Anything Program, which offers a 15-year tax break to eligible developments. 

Houston led the South in office vacancy, with a 23.8% vacancy rate in July, surpassed nationally only by San Francisco (25.4%) and Seattle (23.2%).  

Miami remained the most expensive office market in the South, with asking rents at $49.79 per square foot. Nationally, it was surpassed only by Manhattan ($71.34 per square foot), San Francisco ($61.38) and the Bay Area ($53.71). 

Northeastern Markets

Manhattan Office Sales Hit $2 Billion Mark 

Manhattan remained the national leader in office sales, with total transaction volume up from $1.4 billion in June to over $2 billion in July. The market also led the U.S. in sale prices with an average of $439 per square foot in July, despite a decline from $588 per square foot in the previous month. Conversely, Philadelphia recorded the lowest average sale prices nationwide at just $83 per square foot. 

Manhattan also maintained its position as the most expensive office market nationwide, with average asking rents at $71.34 per square foot in July, surpassing the next-highest rate (San Francisco’s $61.38) by nearly $10. 

Northeast Regional Highlights 

Amid widespread doubts about the office market’s future, some areas in Manhattan appear to be unaffected by these uncertainties. Such an example is Park Avenue, a hotspot for finance giants, with few vacant spaces and some of the highest asking rents nationwide. 

Notable deals in the past month on Park Avenue include Blackstone’s lease agreement that expands its headquarters to over 1 million square feet and JPMorgan’s $300-million acquisition of 250 Park. JPMorgan is also building its new headquarters at 270 Park Ave., a 60-story skyscraper set to deliver 2.5 million square feet of office space in 2025. 

Boston continued to lead the U.S. in office development, with nearly 11 million square feet under construction as of July, equal to 4.4% of existing stock. The slowdown in the life science sector can be seen in Boston as well. As of July, construction of life science facilities has decreased to 8.2 million square feet from 12.4 million square feet one year ago. 

Office-Using Employment  

Office Employment Struggles Intensify 

Office-using sectors of the labor market collectively lost 25,000 workers in July. Most losses were concentrated in the Information sector, which shed 20,000 jobs during the month. The Financial Activities sector decreased by 4,000, and the Professional and Business Services sector shrank by 1,000. 

Office Using Employment 

Metro data, which trails the national release, shows office employment falling in most major U.S. markets in June. On a year-over-year basis, only four of the top 25 markets have seen growth in office-using sectors of the labor market. The market that has lost the most office jobs over the last 12 months was the Twin Cities, with a 6% decrease year-over-year, losing 29,450 jobs. It was followed by Nashville (-4.2%, -13,190 jobs), San Francisco (-3.1%, -17,030 jobs), Chicago (-2.7%, -34,250 jobs) and San Diego (-2.7%, -10,120 jobs). Even markets in Florida and Texas, which saw rapid growth a few years ago, now only show minor increases in office-using employment. 

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Methodology 

This report covers office buildings 25,000 square feet and above. CommercialEdge subscribers have access to more than 14,000,000 property records and 300,000 listings for a continually growing list of markets.  

Get access to over 13M commercial property records with regularly verified commercial data, including local market insights, true ownership and construction projects with CommercialEdge Research. 

CommercialEdge collects listing rate and occupancy data using proprietary methods.  

Listing Rates — Listing Rates are full-service rates or “full-service equivalent” for spaces that were available as of the report period. CommercialEdge uses aggregated and anonymized expense data to create full-service equivalent rates from triple-net and modified gross listings. Expense data is available to CommercialEdge subscribers. National listing rate is an average of all markets. Prior to July 2024, this report used the top 50 markets for a national average.

Vacancy — The total square feet vacant in a market, including subleases, divided by the total square feet of office space in that market. Owner-occupied buildings are not included in vacancy calculations.  

A and A+/Trophy buildings have been combined for reporting purposes.  

Stage of the supply pipeline:  

Planned — Buildings that are currently in the process of acquiring zoning approval and permits but have not yet begun construction.  

Under Construction — Buildings for which construction and excavation has begun.  

Office-Using Employment is defined by the Bureau of Labor Statistics as including the sectors Information, Financial Activities, and Professional and Business Services. Employment numbers are representative of the Metropolitan Statistical Area and do not necessarily align exactly with CommercialEdge market boundaries.  

Sales volume and price-per-square-foot calculations for portfolio transactions or those with unpublished dollar values are estimated using sales comps based on similar sales in the market and submarket, use type, location and asset ratings, sale date and property size.  

Year-to-date metrics and data include the time period between January 1 of the current year through the month prior to publishing the report.    

Market boundaries in the CommercialEdge office report coincide with the ones defined by the CommercialEdge Markets Map and may differ from regional boundaries defined by other sources. 

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