Labout Manhattans The skyline has long symbolized the fortunes of American business. This was heralded by a skyscraper boom in the wild 1920s Rise of the modern office, replete with swivel chairs and desks. As corporate giants emerged and Wall Street firms thrived, the need for office space exploded in the 1970s, fueling a wave of new high-rise buildings like the World Trade Center. Now that hybrid work is drastically lowering demand for physical jobs, a different kind of boom — driven by luxury housing, not offices — is gaining momentum.
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America’s largest office-to-residential conversion to date is underway at 25 Water Street in New York’s Financial District. The building near the New York Stock Exchange will transform a 1.1 million square foot (102,193 square meter) office skyscraper into 1,300 apartments ranging from studios to four-bedroom homes. The redesigned building will include a basketball court, spa, and indoor and outdoor pools. There will also be a rooftop terrace, fun lounge and co-working spaces.
The building is part of a broader trend fueled by a spate of new vacant office buildings. Space requirements for white-collar workers were already declining before the Covid-19 pandemic, but the huge increase in home working has left even more buildings vacant. In the third quarter of 2022, office vacancies in America rose to over 17%, the highest level in almost three decades cbre, a real estate company. About 8.4% of offices in London are vacant, well above that long-term average of around 5%.
cbre estimates that nearly 20 million square feet of office conversions will hit the US real estate market this year; a small fraction of the total supply, but nearly five times what it was in 2016, when the company started collecting numbers. In recent years, a third of all office conversions have been converted into apartments (other favorites include hotels and, increasingly, life science labs). Although much of the recent development has taken place in the large cities of America’s East Coast, offices are becoming apartment buildings throughout the rich world.
Wrench in progress
However, the rate of conversions would be faster if there weren’t a number of challenges. Some are practical. Apartments require natural light and windows in every room – the large floor plans of modern office buildings often leave them stuck with poorly lit and poorly ventilated spaces. Bathrooms in office buildings tend to be clustered into just one area, making installation a nightmare. Other challenges relate to bureaucracy. Land use laws restrict housing construction in many office districts. In some cases, height and density regulations or affordable housing requirements drive up costs. Moody’s Analytics, a consulting firm, estimates that less than 3% of the 1,100 office buildings it tracks in New York meet the various criteria.
Meanwhile, developers looking to remodel offices must buy out or relocate existing tenants. Therefore, the financial arguments for conversions are often unsatisfactory. Only office buildings trading at a deep discount are likely to make profitable transformations. In some cases, remodeling an old office tower can cost more than building a brand new apartment block.
Some politicians are trying to make the process smoother. As office vacancies threaten landlords’ bottom lines, business tax revenues, and the operations of nearby shops and restaurants, cities are relaxing zoning regulations and experimenting with tax breaks. New York Mayor Eric Adams has predicted that such incentives will result in 20,000 new homes in his city by 2033. London plans to add 1,500 new homes to the Square Mile by 2030. Calgary, where one in three offices is vacant, is home to one of the more ambitious plans. In 2021, the Canadian city launched a grant program for developers willing to try their hand at remodeling. Officials have since pledged more than CA$153 million (US$115 million) in grants.
Right now, conversions are a growing but relatively niche occupation. But falling property values, increasingly vacant office cubicles, and growing political support suggest things are about to accelerate. Moody’s Analytics expects the office vacancy rate in America to peak at around 19% in 2023 and remain high for at least five years. Even with a healthy economy, demand for office space is unlikely to return to pre-pandemic levels. Gallup, a research firm, estimates that Americans with jobs that can be done remotely will spend 37% fewer days in the office than before the Covid outbreak.
Indeed, the future may look something like Lower Manhattan. Although 25 Water Street is new, office conversions are an older phenomenon in this area. After the 1987 stock market crash that left nearly one in three New York offices empty, tax incentives were used to entice developers to convert aging office buildings into apartments. The September 11 attacks accelerated the process as businesses moved to other parts of the city. Around 83,000 people live in Lower Manhattan today, up from fewer than 700 in 1970.
The result is a family-friendly enclave and a neighborhood that offers a blueprint for struggling office centers elsewhere. Children on swings in playgrounds and local residents walking their dogs have transformed the fabric of the former Nine-to-Five financial center. A nearby boathouse offers free kayaking on the Hudson River during the summer. In the colder months, skaters whiz around an outdoor ice rink at Brookfield Place, a mall near the waterfront. Even as financial firms have moved, a more creative conglomeration of tenants has moved in, including Condé Nast and GroupM, two media giants. The death of office buildings does not have to mean the death of city centers. ■
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