February 11, 2025 - Office-to-residential conversions are picking up pace this year. Vacancies are still at record levels, and as more distressed properties come online and more cities launch programs, we expect to see even more conversion activity.

Planned conversion projects account for just 1.7% of total commercial properties nationwide. But they can be worth exploring for select properties, provided the numbers work out.

In this article, we explore six things to consider when contemplating a conversion:

• Read the conversion program fine print
• Understand the program and tax incentives
• Calculate the true conversion costs
• Consider the program timing
• Existing tenants
• Capital structure

Read the Conversion Program Fine Print

Not all conversions are residential — a full one-quarter are not. For example, Washington DC’s Office to Anything program permits developers to consider entertainment, hospitality, retail, and more. In New York City’s conversion accelerator program, there are a few guidelines. Developers who can produce more than 50 units must simply submit a proposal.

In many cases, you have more options than you might think.Carefully review the programs in the locations you are considering, and what they permit.

When reviewing, consider questions like:

• Must you employ local workers and firms?
• Do they stipulate a percentage of affordable units?
• How does the program define “distressed?”
• How will the program change over time?
• What is the period of tax abatement?
• Does a target property actually fall within the boundaries?

Understand the Program and Tax Incentives

Most programs promise tax abatements. Some offer access to capital partners and financing. We recommend running the numbers conservatively. Conversions are not, in fact, more popular because the tax incentives often do not always outweigh estimated costs.

According to developer Robert Seldin, who spoke to the Washington Business Journal about his firm’s scrapped Washington DC conversion project, “You’re not paying taxes for not getting revenue.”

Here are a few example program incentives:

• Washington DC Office to Anything: Total tax abatement for up to 15 years
• Miami-Dade County Housing and Community Development: A maximum subsidy of $6,000 per unit
• City of Boston Office to Residential Conversion Program: A payment in lieu of taxes for an average abatement of up to 75% of fair market assessed residential value
• New York City Office Conversion Accelerator: An estimated $300 to $500 per square foot in tax abatement

Calculate the True Conversion Costs

Conversions are costly. Sprawling commercial floorplates are often too large for developers to build residential units that satisfy all the spatial and light requirements and meet the local code. Such alteration estimates can sometimes exceed the cost of new development.

“When you start to add everything up, if your costs get close to new construction, that’s when you get to the point that it doesn’t make financial sense,” Miki Naftali, a developer who has converted five New York properties, told the Wall Street Journal.

Yet opportunities are possible. “It’s still very expensive to convert commercial build offices,” says Cauldwell Wingate President and Chief Executive Officer Rob Palumbo. “We’re seeing some midblock buildings [in New York City] that aren’t too wide or deep where you can still get the effective lighting and air.”

When calculating the true conversion costs, consider:

• Value-engineering the project
• Converting the lobby, facade, and windows
• Converting the mechanical services
• The insurance to cover the project

Consider the Program Timing

Many programs are funded by cities on a first-come, first-served basis. Reach out to those local officials to inquire how much funding is still left or will be left at the time of your application.

Programs can also shift with changing political seasons. In late 2024, the then mayor of San Francisco announced she was ending the existing office conversion program. She was then unsuccessful in her bid for office. The new mayor has not yet confirmed the program's status but is expected to renew it with modifications.

Existing Tenants

Despite all the public disturbance over commercial vacancy, many distressed properties still contain commercial tenants holding long-term leases with no desire to leave. Some investors and developers now include clauses to evict existing tenants in their contracts, but these are facing legal pushback.

Have these tenant conversations early. Consider contacting those tenants with permission to feel out the situation and factor in the costs of any deals you would have to cut to convince them to exit.

Capital Structure

Incentives are often not enough to outweigh conversion costs to make the deal attractive. Carefully consider your capital stack. Many investors are now more comfortable operating in the center of the capital stack than solely on the equity side and prefer equity and mezzanine debt.

GFP Real Estate lowered the costs of a $240 million conversion in lower Manhattan by buying debt at a discount and cutting deals with tenants to let go of their leases.

For more about evaluating your capital stack, read our latest real estate opportunities report.

Stay Involved and Keep Learning

Many firms we talk to are keeping an ownership stake in distressed properties up for conversion if only to learn through the process. Conversions are complex, and those firms are right to want to keep some investment to force themselves to learn.

While not widespread enough to change the commercial market or solve the housing crisis, conversions are an increasingly popular tool — one well worth exploring for distressed properties.

To discuss real estate conversions, your capital stack, or your tax strategy this year, reach out to our Real Estate Industry Practice.