Fifty percent of first-half 2024 development sales in Manhattan involved office-to-residential conversion projects, according to a new study, as the office vacancy rate still appears to be near record highs.

Development sales in Manhattan in the first six months of this year more than doubled to $1.12 billion from a year earlier, with office buildings sold for office-to residential conversions accounting for 50% of that sales volume, according to the study by Ariel Property Advisors.

The growth rate in Manhattan’s development sales outpaced the 14% increase to $5.8 billion in the borough’s first-half investment sales across property types and topped the 26% increase in citywide investment sales to about $11.8 billion, the Ariel report said.

As CoStar data shows New York’s office vacancy rate still near a record high of 14%, with 3.4 million square feet of net more space vacated than occupied in the past 12 months, there’s increased talks about office-to-residential conversion in response to the empty or underutilized office stock. The state and city governments also have proposed or introduced incentives to speed some of those conversions.

“We see opportunities in conversions from office to residential in the buildings that can lend themselves to that,” Shimon Shkury, Ariel’s president and founder, said in an interview. Shkury added, however, it’s a “very hard thing to do.”

More than 60 office building owners have expressed interest with the Department of City Planning to redevelop their office buildings for residential use, Ariel said in the study.

While nationwide interest in office-to-residential adaptive reuse has increased, especially against a housing supply shortage in many parts of the country, various zoning, logistical and financial challenges make the conversions difficult, according to a study by the U.S. Department of Housing and Urban Development.

“Office conversions are a challenger” in general, TD Bank’s New York market president, Ralph Bumbaca, said on Wednesday at an event hosted by Ariel at TD’s Manhattan flagship office inside SL Green Realty’s trophy tower One Vanderbilt. “It’s going to be very difficult to finance.”

Christopher Albanese, president of the Garden City, New York-based developer Albanese Organization, said Albanese looked at a number of office-to-residential projects in New York but “haven’t pulled the trigger.”

“They are very difficult,” he said at the Ariel panel. “The bigger office buildings are difficult to convert. We're going to see a lot of the smaller office buildings, side-street office buildings [spanning] 100,000 [to] 200,000 square feet. You're going to see a lot of these buildings get knocked down and new apartment buildings get built. We're getting to the point where these [Class] B and C office buildings are worth less than the land. A lot of them were built in the '30s, '40s, '50s. These buildings are … obsolete. That's why a building like [One Vanderbilt] gets $250 [per square] foot and you have buildings on Third Avenue that … have the 8-and-a-half-foot ceilings. They don't have the window, [and are in an] inferior location. I think we're going to be surprised by how many buildings start to get knocked down.”

Jasper Wu, vice president at New York developer ZD Jasper, agreed.

“I see an office-to-residential conversion [prospect] across my desk probably once a week,” Wu said at the Ariel event. “Demolition in New York City is really not that expensive. With these [conversion proposals], maybe they look good on paper. But with these kind of conversions, you always run into unexpected issues and unexpected costs. So you go through all this trouble, and you end up with not a high-efficiency product and not a high-efficiency building. For me, it’s never really appealed to us.”

Despite the challenges, several office-to-residential projects are set to be underway.

For example, Pfizer’s old headquarters at 235 E. 42nd St. on the east side of midtown Manhattan is being redeveloped to feature more than 1,500 units of housing, according to an Ariel presentation.

Just recently, 100 Wall St., a 29-story office property in New York’s Financial District, was sold for $116 million with the buyers planning to convert the property for residential use.