INSIGHT

Office conversions and demolitions outpacing new construction 

Mark Leverette • July 2, 2025

Industries: Real Estate

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The commercial real estate landscape is undergoing its most dramatic shift in decades. For the first time on record, the amount of office space being demolished or converted to other uses will significantly outpace new office construction in 2025. This unprecedented reversal signals a fundamental change in how we think about commercial real estate—and what it means for your business strategy. 

If you’re a property owner, developer, or investor trying to navigate this new reality, understanding these market dynamics has never been more critical to your financial success. 

The numbers tell a compelling story 

The data from CBRE’s latest research reveals just how dramatically the market has shifted: 

• More than 23 million square feet of office space across 58 markets is scheduled for demolition or conversion in 2025  
• Only 12.7 million square feet of new office space will be completed this year  
• Compare this to 2019, when nearly 60 million square feet of new office space came online while less than 10 million square feet was repurposed 

This represents a complete reversal from pre-pandemic trends, when new construction consistently outpaced conversions and demolitions combined. 

Why conversions are gaining momentum 

Rising apartment rents make projects financially viable 

The economics of office-to-residential conversions have fundamentally changed. What didn’t make financial sense five years ago may now be a profitable venture, thanks to steadily increasing apartment rents across many markets. This shift in rental pricing has brought previously unviable conversion projects within reach of positive returns. 

Local governments are removing barriers 

Cities across the country are actively encouraging these transformations through policy changes: 

• Washington, D.C.’s “Office to Anything” program streamlines the conversion process  
• Manhattan’s “City of Yes for Housing Opportunity” zoning reform targets underutilized buildings in Midtown  
• Chicago has introduced new legislation and incentives for conversion projects 
• San Francisco recently passed legislation creating a downtown revitalization financing district that will use property tax increment financing to promote the conversion of vacant office buildings into residential housing. The program could convert approximately 50 downtown properties into over 4,000 housing units. 

These policy shifts recognize that converting underused office buildings can address housing shortages while revitalizing downtown areas. 

Which buildings make the best conversion candidates 

Not all office buildings are created equal when it comes to conversion potential. The age and design of your property significantly impact its viability: 

Pre-1970s buildings often excel as conversion targets 

Older office buildings frequently offer distinctive architectural features and floor plans that translate well to residential use. These properties represent 65% of current conversion projects, despite making up a smaller portion of the overall office inventory. 

1970s and 1980s buildings face greater challenges 

Properties from this era typically feature large floor plates that don’t easily accommodate multifamily layouts. While these buildings represent more than half of all demolitions, they account for only 35% of conversions. 

Geographic hotspots and market variations 

Manhattan and Washington, D.C., dominate conversion activity with 10.3 million and 9.2 million square feet respectively in their development pipelines. These markets benefit from strong rental demand and supportive local policies. 

Smaller markets showing outsized activity 

Cleveland stands out among secondary markets, with 8.4% of its office inventory either undergoing or planned for conversion—the highest percentage of any city in the study. The city’s high construction costs, low office rents, and limited land availability have historically favored conversion projects. 

Understanding conversion trends by property type 

Most office conversions target the residential market: 

• 76% of conversions by square footage become multifamily housing  
• 3% convert to life science facilities (down from earlier post-pandemic highs)  
• Small percentages become hotels or industrial space 

This residential focus reflects both market demand for urban housing and the practical considerations of adapting office floor plans for different uses. 

Tax and financial implications you need to consider 

These market shifts create complex tax and accounting considerations that require careful planning: 

Depreciation and cost recovery strategies 

Converting an office building involves significant capital expenditures that must be properly categorized and depreciated. Understanding the difference between improvements that extend useful life versus those that constitute new property can substantially impact your tax position. 

Section 1031 exchange opportunities 

The changing office market may affect your ability to identify suitable replacement properties in like-kind exchanges. Planning becomes even more critical when traditional office-to-office exchanges may not align with market realities. 

Opportunity zone considerations 

Many office buildings targeted for conversion sit within qualified opportunity zones, potentially offering significant tax advantages for the right investment structure. 

Strategic planning for property owners and investors 

Evaluate your portfolio proactively 

Rather than waiting for market forces to dictate your options, conduct a thorough analysis of your office holdings. Consider factors like: 

• Building age and architectural features  
• Local zoning and conversion policies 
• Rental market conditions for alternative uses  
• Capital requirements for conversion versus continued office use 

Consider timing and market cycles 

While conversion activity is accelerating, successful projects require careful timing. Market conditions, construction costs, and regulatory environments all influence project viability. 

Plan for the long term 

This office transformation isn’t a temporary blip—it represents a structural shift in how we use urban space. Your real estate strategy should account for these changing dynamics over the coming decade. 

What this means for your business moving forward 

The office conversion trend reflects broader changes in work patterns, urban living preferences, and municipal planning priorities. As a business owner or investor, staying ahead of these shifts positions you to capitalize on opportunities while avoiding potential pitfalls. 

Whether you’re considering converting existing properties, investing in conversion projects, or simply trying to understand how these trends affect your market, the financial and tax implications require careful analysis and strategic planning. 

At BPM, we help clients navigate the complex tax, financial, and strategic considerations that come with major real estate decisions. Our team understands the nuances of real estate taxation, entity structuring, and investment analysis that make the difference between a successful project and a costly mistake. 

Ready to explore how these market trends might affect your real estate strategy? Contact BPM today to discuss your specific situation and discover how we can help you make informed decisions in this evolving market.