A billion square feet of new residential space will emerge in cities as America’s office market faces a major crisis

America’s office market is teetering on the brink of a massive shakeout as mounting debt and a permanent shift to remote work leave countless office buildings across the country empty and struggling.

In response, experts predict a wave of fire sales and conversions that will turn these once-booming office towers into much-needed residential housing. With vacancy rates as high as 80% in some B-grade office buildings – the older, less attractive properties in need of renovation – the clock is ticking for landlords and banks.

“Banks are going to have to dispose of that real estate,” said Richard Barkham, global chief economist for CBRE, in an interview with Business Insider. “I think we’re going to see a wave of offices turning into banks… they’re going to be laid off and either torn down or converted.”

Already, major financial institutions are shedding these troubled assets from their balance sheets, with the total amount of commercial real estate loans held by banks at $2.9 trillion from a peak of $3 trillion earlier this year.

Some of the hardest-hit properties are expected to be part of the growing trend of office-to-apartment conversions — a transformation that has taken off since the pandemic. In 2024, the number of office spaces converted to apartments increased to 55,000, a staggering 357% increase from 2021, according to data from Yardi Matrix.

“There is a solid base of really bad performing offices that will be destroyed over the course of 2025,” Barkham said. “It’s pretty clear that we don’t need as much office space in the United States as we’ve had.”

While high-end properties in prime locations are still attracting tenants, the remote working revolution has left the wider office market in shambles. National office vacancy rates hit 19.4% in August, marking a sharp increase from last year, according to CommercialEdge.

As more offices sit empty, the opportunity to repurpose these buildings is gaining steam. John Vavas, a real estate financial attorney with Polsinelli, says the conversion trend is here to stay.

“The idea of ​​people being in the office three days a week versus five days a week was the exception, not the standard. And now it’s the opposite,” Vavas told the newspaper. “If you do that in a company… your demand will drop.”

“And when it comes down to this post-pandemic thinking of being in the office again, then I think you have to start looking at, well, I have this space. What are the needs for the community, for the location? And in New York, it just happens to be residential.”

Big cities like Washington DC, New York and Los Angeles are at the forefront of this new era, with a combined 19,462 office-to-residential conversions in the pipeline.

Yardi Matrix estimates that 1.2 billion square feet of office space could be converted to residential, while a separate analysis from CBRE projects that 1.38 billion square feet of office space could eventually be transformed over time. .

In some cases, architects have had to drill holes in skyscrapers to rearrange the interior structure, but for owners stuck with empty floors, the effort is worth it.

In New York, Silverstein Properties has already committed $1.5 billion to convert part of its office portfolio into residential units.

However, these projects are costly and complex, mainly because office buildings and apartment buildings have completely different internal structures.

“You’re going to see vacant buildings and you’re going to see offices open for a significant amount of time,” Barkham noted. However, with the ongoing US housing shortage and declining demand for office space, these conversions could provide a lifeline for struggling real estate investors.

Vavas pointed to a recent deal where a property sold at a 20% to 30% discount simply because the owners wanted to “cut their losses.”

As more landlords face a similar fate, the office market will evolve, slowly but surely, into something that looks very different from the gleaming office towers that once lined America’s city streets.

For cities where office vacancies are high, it can also mean the growth of new neighborhoods, with more shops, restaurants and theaters filling the gaps. It’s a dramatic reshaping of urban real estate, but one that experts believe is inevitable in a post-pandemic world.