February 18, 2025 - Office conversions have been increasing as office vacancy rates remain high and property values fall. While this is almost certainly not the beginning of a market-wide shift about to disrupt commercial real estate, it is a worthwhile option to consider for owners or investors of a distressed building.

Developers completed an estimated 73 conversions in 2024 and have 309 planned for this year and next, according to CBRE. However, they represent just 71 million square feet out of billions or 1.7% of all commercial real estate. This activity varies widely by market and is predominantly concentrated in a few dozen localities that have created programs to make conversions attractive.

Though they are not a fix to everything and are not as widespread as you might think, conversions are, situationally, quite useful.

Conversion Programs With Incentives Are on the Rise

Cities don’t want commercial buildings vacant any more than their owners do, so many major metropolitan areas have launched programs sponsored at the city or state level to support conversion. San Francisco, New York City, Boston, Miami, Chicago, and countless others have such programs.

The specific intent of each program varies, and you must read the fine print. Miami’s program, the Workforce Housing Program, aims to allow more people who work in the city to also live there. While three-quarters of programs are aimed at converting to multifamily, one-quarter are not.

Washington DC’s program, Office to Anything, allows property owners to convert to hotels, retail, or entertainment.

The tax incentives with these conversions can be lucrative. New York State’s program offers tax reductions of up to 90%. Chicago’s program will reduce taxes up to 75% for 25 years.

Conversion opportunities also are not limited to the U.S. Calgary, Canada has suffered a high number of vacancies and now has become the poster child of conversion programs in North America after offering incentives as high as $55 per square foot.

Even with tax incentives, obstacles remain.

Obstacles to Conversion

Even with the increase in conversions and their accompanying tax incentives, conversions are met with obstacles, like:

• Building structures and floor plates
• Vacancy
• Zoning restrictions
• Financial viability

Building structures and floor plates

Many floors are built too large, and it is difficult to meet residential light and air requirements. In response, some developers have solved this issue by converting older buildings with smaller floor plates.

For example, Macklowe Properties, the developer of the recently converted 1 Wall Street in Manhattan, built a floor plan full of bedrooms and “great rooms” along the building’s perimeter and hallways and bathrooms in the interior. They were able to create 566 condominiums in this way.

Vacancy

Despite the worryingly low occupancy rates and negative NOI, many convertible buildings are still half occupied by commercial residents holding long-term leases with no plans to leave. To address this, developers are negotiating with those tenants as they negotiate the overall deal. Some are offering incentives to move or enlisting the help of local authorities.

Zoning restrictions

Many conversion programs set strict zoning limits and require that buildings be in distressed areas, in areas where it’s viable to produce low-income housing, or even near amenities such as groceries and transportation. Smaller cities tend to be more able and willing to work with developers and zoning restrictions.

Financial viability

Even if everything else works out, from building structure to zoning, the numbers may not. Conversions can be expensive, and buildings must be priced favorably to be viable.

Buyers must also review the full capital stack for options, including non-obvious tax incentives and creative financing such as C-PACE loans.

The Next Two Years Will Be Full of Conversions

While there will be double the number of conversions in 2025 than the year prior, we don’t expect they’ll impact the broader office market dynamic. We also don’t expect them to address the current housing shortage — the current scheme produced 55,000 additional housing units last year, whereas the U.S. housing deficit is 2.8 million homes. New York alone is short 100,000. Given the uptick in conversions recently and the available incentives put into place by many municipalities, we can expect that building owners of distressed office properties will increasingly consider the viability of a conversion as an option.

For more information about real estate conversions, contact our Real Estate Industry Practice and read our latest report on the top opportunities in real estate.

Watch Partner Meyer Mintz and Cauldwell Wingate President and Chief Executive Officer Rob Palumbo discuss conversions.