Office-to-Residential Conversions Gain Traction Amid Vacancy Surge
By Majid Radaei, RadCRE · · Industry Insights
With office vacancies hitting historic highs, major metropolises like New York and Chicago are seeing increased momentum in office-to-residential conversions, driven by tax incentives and the potential for higher returns.
The Widening Chasm: Office Vacancy and Housing Demand
The landscape of commercial real estate continues to recalibrate, with a stark divergence emerging between struggling office sectors and resilient, undersupplied residential markets. As of Q4 2025, U.S. office vacancy rates hovered near 19.8%, a figure not seen since the early 1990s, according to CBRE Research. This persistent weakness, driven by remote and hybrid work models, has intensified focus on the adaptive reuse of underperforming office assets, particularly their conversion into multifamily housing.
Cities grappling with both high office vacancy and acute housing shortages are at the forefront of this trend. New York City, for instance, has seen a surge of proposals and enacted legislative changes to facilitate such projects. The City Council's 'City of Yes for Housing Opportunity' text amendment, expected to pass in 2026, aims to ease zoning restrictions that have traditionally hindered conversions. This follows the state's 485-x tax incentive program, targeting conversions of commercial buildings constructed before 1999.
Major Players and Notable Projects
Institutional investors and developers are increasingly recognizing the value proposition. Starwood Capital Group, a prominent global private investment firm, has been actively exploring these opportunities. While specific public deals are often complex and slow-moving, firms like Starwood, Brookfield, and RXR Realty have publicly expressed interest and begun underwriting numerous potential conversion candidates across the U.S.
In Chicago, a notable project illustrating this trend is the former BMO Harris Bank building at 115 S. LaSalle Street. Loop Capital Markets and Riverside Investment & Development acquired parts of the 40-story tower with plans to convert over 500,000 square feet into residential units. This transformative project, backed by significant public subsidies, underscores the financial complexities and public-private partnerships often required to make such large-scale endeavors feasible.
Financially, these projects require careful underwriting. While construction costs for ground-up development have plateaued, conversion costs can still be substantial, averaging $200-$400 per square foot depending on the level of intervention required, including plumbing, HVAC replacements, and facade alterations. However, the ability to capitalize on existing building shells often makes them more economical than new construction, especially in dense urban cores where land is scarce and expensive.
Majid Radaei, Founder of RAD Commercial Realty, notes: "We're seeing a fundamental shift. Office buildings, particularly B and C-class assets from the 1970s and 80s, are often functionally obsolete for modern office tenants but offer excellent bones for residential conversion. The challenge lies in the capital stack. Traditional lenders are still cautious, so we're structuring deals with a blend of preferred equity, C-PACE financing, and state or municipal incentives to bridge the cap. The key is identifying properties with favorable floor plates, sufficient natural light, and robust underlying residential demand that can justify the higher per-unit redevelopment costs.”
Feasibility and Future Outlook
Successful conversions hinge on several factors: the building's structural integrity, floorplate dimensions conducive to residential layouts, access to natural light, and proximity to amenities. According to a recent JLL study, only a fraction of existing office buildings are highly suitable for conversion without significant structural overhaul. However, the sheer volume of distressed and vacant office space means that even a small percentage of feasible conversions can deliver thousands of much-needed housing units.
The financial viability is increasingly aided by innovative financing. Bridge loans, often at SOFR + 300-600 basis points, are common for acquisition and initial planning. Construction financing, once the entitlement process is clear, can still be challenging but accessible for well-capitalized sponsors. Public sector incentives, such as property tax abatements or grants, are proving crucial in closing the financial gap for many projects, especially in jurisdictions keen to boost housing supply and revitalize downtowns.
The office-to-residential conversion trend is more than just opportunistic; it's a strategic imperative for urban revitalization and sustainable development. While not a panacea for all office woes, it represents a significant and growing avenue for value creation in commercial real estate.
RAD Commercial Realty assists clients in navigating these complex conversion opportunities, from identifying suitable assets and conducting comprehensive feasibility studies to structuring optimal capital stacks and securing favorable financing.
Tags: office-to-residential conversion, commercial real estate, adaptive reuse, urban planning, multifamily development, CRE financing, RAD Commercial Realty
Sources: CBRE Research, JLL, Commercial Observer, CoStar, Loop Capital Markets, Starwood Capital Group