Top Office Owners Don’t Want to Own Only Office Buildings Anymore
Apartment-building acquisitions spur quick returns, require ‘minimal capital expenditure’
4 min
Many of the most prominent office developers in the U.S. are shifting gears, looking to buy or build real estate that isn’t office.
Boston Properties Inc. is planning to develop 2,000 residential units up and down the East Coast. The firm, which owns more U.S. office space than any other publicly traded company, also is developing millions of square feet of lab and life-science space.
New York office owner SL Green Realty Corp is teaming up with Caesars Entertainment Inc. in a bid to convert a Times Square office tower into a casino.
Even the companies behind some of the world’s most glamorous skyscrapers are seeking out other types of real estate. Empire State Realty Trust, owner of the Empire State Building and other office towers, late in 2021 started adding multifamily properties to its portfolio for the first time. Silverstein Properties, best known for developing the World Trade Center in lower Manhattan, is raising a $1.5 billion fund for converting obsolete office buildings into apartments.
The efforts come as the Covid-19 pandemic and rise of remote work have reordered American habits around the workplace, dimming the importance of office towers that populate city business districts. Shares of publicly traded office owners have broadly declined as investors and analysts worry that the companies’ growth prospects have been hurt by the likelihood of a long-term decline in office demand.
The U.S. office vacancy rate was 12.3% at the end of the third quarter, about where it was at its peak during the global financial crisis, according to data firm CoStar Group Inc. The rates in some major metro areas—including New York, Washington, D.C. and San Francisco—are at the highest levels that CoStar has recorded in more than two decades of tracking this data.
Corporate tenants are flooding the sublease market with office space, the main way to reduce their footprint before their leases expire. About 211.8 million square feet of sublease space is now available, nearly double the amount available compared with the end of 2019, and the highest ever recorded for major office markets, CoStar said.
Companies are also putting off searches for new space as they brace themselves for a possible economic downturn in 2023. New business searches for office space fell in 2022 to 44% of what they were in 2018 and 2019, according to VTS, a firm that operates a data platform that tracks tenant demand.
Other real-estate sectors, especially residential, seem to offer more promise.
“Office is in a state of flux these days,” said Rich Gottlieb, president of Keystone Development + Investment, a West Conshohocken, Pa.-based developer specialising in offices that has four residential projects in the pipeline in South Florida and the Philadelphia region. “But there’s still a housing shortage out there.”
Office developers pivoting toward residential or other property types say they remain bullish on the office business. Many have predicted throughout the pandemic that businesses will return in greater numbers because, they have said, the best collaboration requires face-to-face meetings in a workspace—not over Zoom.
And more recently, office owners can point to encouraging signs, including the growing number of employers who are ordering workers back to the offices and the strong demand for space with the best facilities and locations.
But developing state-of-the art office space requires an enormous capital investment to meet workers’ desire for the highest possible air quality, energy efficiency and amenities.
The economics of the residential business are currently more compelling, said Tony Malkin, chief executive of Empire State Realty Trust. He would still buy office buildings at the right price. But apartment-building acquisitions produce an immediate return and require “minimal capital expenditure,” he added.
An office landlord known as New York City REIT, whose share price has fallen below $2 during the city’s recent office slump, said it was moving beyond a focus on New York office buildings, according to a December filing with the Securities and Exchange Commission. The company said it would seek to acquire hotels and parking lots, among other non-office investments.
The shift away from new office development already is having a moderating impact on new construction. About 153 million square feet of office construction was under way in the third quarter of 2022, down from 184 million in the first quarter of 2020, according to CoStar.
Meanwhile the popularity of residential projects is having the opposite effect on the apartment pipeline. Close to 500,000 units—the most since 1986—are expected to be completed in 2023, according to a CoStar estimate. That is up from 368,000 in 2019, the firm said.
Some office developers began expanding into residential projects in the years leading up to the pandemic. AmTrust Realty Corp., which has a portfolio of about 12 million square feet of office space in Chicago, New York, Toledo, Ohio and other markets, completed its first residential development in 2020, a 270-unit project in Brooklyn.
The pandemic intensified AmTrust’s appetite to do more residential investment, said Jonathan Bennett, president of the family-controlled business. As one example, he noted that AmTrust has owned for years an office building in Tarrytown, N.Y., on a 7-acre site facing the Hudson River.
AmTrust has long considered the building a good candidate for residential conversion. Now, with the Tarrytown building’s vacancy rate high, the company is moving ahead with planning and obtaining local-government approvals for a development with scores of apartments.
“There was so much vacancy in the building, I said to my board, there will be no better time for us to put forward this plan,” Mr. Bennett said. “If this is what you want to do, this is the time to do it.”
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5 min
Australia’s housing market has weakened more sharply than the Reserve Bank anticipated, with higher interest rates, deteriorating sentiment and changing tax settings pushing the national market into reverse.
Reserve Bank governor Michele Bullock acknowledged the extent of the slowdown in a speech to the Anika Foundation Fundraising Lunch in Sydney on July 28.
Housing conditions had “eased by more than we had anticipated in May”, she said, after the Bank expected its interest-rate increases to take some heat out of the market.
Bullock attributed the larger-than-forecast slowdown to several forces, including recent housing policy developments and a broader deterioration in market sentiment.
The latest Cotality Home Value Index illustrates the change. National dwelling values fell 0.4% in June, the largest monthly decline since December 2022, taking values 0.7% lower over the June quarter.
The combined capital-city index fell more heavily, declining 0.6% in June and 1.3% over the quarter. Regional values continued to outperform, rising 0.3% for the month and 1.1% over the three months to June.
Sydney and Melbourne lead the falls
The downturn remains concentrated in the country’s two largest housing markets.
Sydney dwelling values fell 1.2% in June and 3.2% over the quarter. By the end of the month, values were 3.7% below their January 2026 peak.
Melbourne values declined 1% in June and 2.6% over the quarter, leaving the market 4% below its March 2022 peak. Melbourne was also the only capital to record an annual decline, with values down 0.9% over the year to June.
Canberra fell 0.6% for the month and 1.3% over the quarter, taking values 2.9% below their May 2022 high. Hobart, despite rising 0.6% in June, remained 0.7% below its March 2022 peak.
Conditions were markedly different elsewhere.
Brisbane values rose 0.3% in June, Adelaide was unchanged, Perth gained 0.7% and Darwin climbed 1.4%. All four remained at record highs at the end of June.
| Capital | June change | June-quarter change | Change from peak |
|---|---|---|---|
| Sydney | -1.2% | -3.2% | -3.7% |
| Melbourne | -1.0% | -2.6% | -4.0% |
| Brisbane | +0.3% | +1.3% | At peak |
| Adelaide | 0.0% | +1.3% | At peak |
| Perth | +0.7% | +2.0% | At peak |
| Hobart | +0.6% | +1.4% | -0.7% |
| Darwin | +1.4% | +5.0% | At peak |
| Canberra | -0.6% | -1.3% | -2.9% |
The figures reveal a divided national market rather than a uniform correction. Sydney and Melbourne are falling comparatively quickly, but strong annual gains remain intact in Brisbane, Perth, Darwin and Adelaide.
Perth values were still 23.9% higher over the year to June, while Darwin was up 19.8%, Brisbane 17.4% and Adelaide 11.6%.
Even Sydney remained 0.3% higher over the year despite its recent decline.
Bullock consequently characterised the pullback in established home prices as “modest” following a period of strong growth. She noted that Sydney and Melbourne values remained around the levels recorded before the RBA began raising rates again in February.
Buyers regain leverage
The weakness extends beyond headline prices.
Cotality estimated that capital-city sales over the three months to June were 16.2% lower than a year earlier and 14.5% below the five-year average for that time of year.
Advertised supply across the capitals was almost 11% higher than a year ago, while the combined capital-city auction clearance rate had remained below 50% since late May before falling into the low-40% range from late June.
Cotality research director Tim Lawless said the accumulation of available homes was primarily a symptom of weaker demand rather than a surge in new listings. Buyers had more properties to choose from, less urgency and greater negotiating power.
Affordability was already constraining demand before the latest interest-rate increases. Higher mortgage costs, cost-of-living pressures, pessimistic consumer sentiment and proposed federal changes affecting property investment have since added to the slowdown.
The result is likely to be a gradual decline rather than a severe national correction. Population growth, tight rental markets and limited new housing supply continue to support values, but they are increasingly being offset by weaker confidence and reduced borrowing capacity.
The RBA has erased all three of last year’s cuts
The speed of the housing slowdown becomes clearer when placed against the sharp reversal in monetary policy.
The RBA cut the cash rate three times in 2025:
- From 4.35% to 4.10% in February
- To 3.85% in May
- To 3.60% in August
Those reductions delivered 75 basis points of easing as inflation appeared to be returning sustainably to the Bank’s 2–3% target range.
The direction changed abruptly in 2026 after inflation accelerated and the economy was judged to be operating with greater capacity pressure than previously thought.
The RBA increased the cash rate by 25 basis points in February, March and May, lifting it from 3.60% to 4.35%. Those three increases have exactly reversed the 75 basis points of relief delivered last year.
The Board left the rate unchanged at its June 16 meeting, meaning the cash rate has been at 4.35% since May 5.
Higher mortgage rates and tighter lending assessments have reduced the amount many households can borrow, while also increasing repayments for existing variable-rate borrowers. The effect has been particularly visible in Sydney and Melbourne, where values are high and buyers are more sensitive to changes in borrowing capacity.
Bullock said the housing slowdown had gone further than the RBA forecast in May, but borrower distress remained contained. Fewer than 1% of borrowers were in negative equity, she said, and only a small proportion of that group was estimated to be experiencing severe repayment difficulty.
The labour market has also softened more than expected, with unemployment rising further than the Bank forecast. That creates a more complicated decision for the Board: inflation remains too high, but the effects of its previous tightening are becoming clearer across employment, household confidence and housing.
Bullock nevertheless reiterated that the Board was prepared to increase the cash rate again if required to meet its mandate.
The Big Four are divided over what comes next
The major banks agree that meaningful rate relief is unlikely in the immediate future, but they differ sharply over whether the RBA has finished raising rates.
Commonwealth Bank expects the cash rate to remain at 4.35% for the rest of 2026. Its economists have pencilled in the first cut for May 2027, followed by another in August, which would reduce the rate to 3.85%.
NAB also believes the next move is likely to be down, although it has expressed less confidence about the timing. Its forecast has the cash rate ending 2027 at 3.60%, implying three quarter-point cuts over the year.
ANZ’s July base case is for the RBA to remain at 4.35% until the second half of 2027. Its economists have not ruled out another increase in November if inflationary pressure intensifies. ANZ’s previously published central forecast included two cuts during 2027, taking the rate to 3.85%.
Westpac remains the outlier. Its July outlook anticipates two further rate increases during 2026, which would lift the cash rate to 4.85%, before an easing cycle begins later. This more hawkish view reflects concern that persistent inflation and energy-related cost pressures could require the RBA to tighten policy again.
| Bank | Expected 2026 direction | Expected easing |
| CBA | Hold at 4.35% | First cut forecast for May 2027; second in August |
| NAB | Hold; next move expected to be down | Cash rate forecast to end 2027 at 3.60% |
| ANZ | Hold at 4.35%, with a November hike risk | Base case has easing beginning in the second half of 2027 |
| Westpac | Two further hikes, potentially reaching 4.85% | Easing expected only after the additional tightening cycle |
These forecasts are highly conditional. Inflation, employment, household spending and the international energy outlook could all materially alter the timing.
The June-quarter Consumer Price Index, due on July 29, will be central to the RBA’s updated economic forecasts ahead of its August 11 meeting.
A softer inflation result, combined with weakening employment and housing, would support the case for an extended pause. A stronger result—particularly in underlying inflation—would keep another increase in play.
For the housing market, even an extended hold would mean borrowers receive no early relief from the 2026 increases. Cotality expects momentum to weaken further, with expensive markets, investor-heavy areas and locations carrying elevated advertised stock among those most exposed.
Australia is not yet experiencing a broad housing collapse. Prices remain at record highs in half of the capitals, negative equity is rare and national values are still 7.3% higher than a year ago.
But the direction has changed. The RBA has removed all of last year’s rate relief, buyers have regained leverage and the country’s largest housing markets are now leading a downturn that has already proved deeper than the central bank expected.
Rising rates, construction inflation and shrinking investor confidence are pushing Australia deeper into a dangerous housing spiral that monetary policy alone cannot fix.
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