CBRE's Q1 2026 office report, released this morning, showed national office vacancy at 22.1 percent, the highest rate in the post World War Two measurement period. Manhattan hit 24.3 percent. San Francisco hit 32.8 percent. Chicago's Loop hit 29.2 percent. Houston Energy Corridor hit 33.1 percent. The secondary markets held up better but still showed vacancy in the high teens. Nashville's downtown core came in at 18.4 percent, up from 16.9 percent a year ago.
What changed in Q1 2026 was the pace of conversion projects. CBRE tracked 94 office to residential conversion projects that broke ground between January 1 and March 31, more than in any prior quarter since the firm started tracking the category in 2019. The pipeline of projects in predevelopment is even larger. RCLCO tracked 412 active predevelopment projects at the end of March, representing approximately 89,000 potential residential units and 118 million square feet of office conversion inventory.
Three factors lined up to unlock the conversion market after years of slow movement. The first is office building values. Class B and Class C office in most major markets has traded 40 to 65 percent below 2019 peaks in the last 18 months. At those price points, the math on a gut renovation and conversion finally works, even with conversion construction costs that run 15 to 25 percent higher than ground up multifamily. The second is interest rates. Conversion financing is still expensive but the decline from the late 2023 peak has pulled enough deals into feasibility. The third is municipal policy. More than 30 major cities have passed conversion specific incentive programs in the last 24 months, including accelerated permitting, tax abatements, and zoning overlays that allow conversion projects to bypass traditional commercial to residential change of use reviews.
New York's program is the largest. The Office Conversion Accelerator Program, which passed the city council in 2024 and expanded in 2025, has approved 31 projects in Manhattan, Brooklyn, and Queens representing 14,800 units. Chicago's Central City Conversion Program has approved 18 projects representing 6,100 units. Los Angeles's Adaptive Reuse Ordinance 2.0, which streamlined the older 1999 ordinance, has approved 22 projects representing 8,400 units. Philadelphia's Center City Conversion Initiative has approved 9 projects.
Nashville has been slower to the conversion market than its peers. Metro Nashville has not passed a conversion specific incentive program. The city's commercial to residential reviews still go through the standard permitting track. That has meant most Nashville office conversions have been driven by private market economics rather than subsidy. The 505 Commerce Street conversion by Highwoods Properties, which broke ground in December, is one of the first substantive downtown Nashville conversions. The project will deliver 124 residential units by late 2027 and represents a 68 million dollar renovation on a building that traded at 31 percent of its 2019 assessed value.
Several specific conversion projects worth tracking. 25 Water Street in Manhattan, owned by GFP Real Estate and Metro Loft, is the largest office to residential conversion in US history at 1.3 million square feet and 1,320 apartments. The project is scheduled to deliver in phases through 2026 and 2027. One Wall Street in Manhattan, converted by Macklowe Properties, delivered 566 units and leased up 91 percent in the first six months. 160 Water Street, another Metro Loft project, delivered 588 units and is now fully stabilized. 55 Broad Street is mid conversion and will deliver 571 units. The Manhattan office pipeline alone will deliver roughly 18,000 residential units by 2028 if the current projects stay on schedule.
The challenge with conversion projects is that not every office building converts well. Class A trophy office built in the 1980s and 1990s with deep floor plates and limited exterior window access does not convert economically. The best conversion candidates are older Class B and C buildings built between 1900 and 1960 with narrow floor plates, high ceilings, and good window to floor ratios. This is why the conversion market is concentrated in older urban cores. New York's financial district has more pre 1960 office than any other market in the country. Chicago's Loop has the second most. Philadelphia, Pittsburgh, and St. Louis all have deep inventories of convertible older office.
The financing side has opened up meaningfully in the last 12 months. JP Morgan, Wells Fargo, and Bank of America have all set up dedicated office conversion lending desks. Freddie Mac and Fannie Mae have both issued conversion specific multifamily loan products that allow for higher loan to cost ratios and longer interest only periods. Non bank lenders including Blackstone, Starwood, and KKR have all raised conversion focused debt funds in the last 18 months. The total pool of capital available for office conversions is now estimated at over 45 billion dollars, compared to less than 8 billion at the end of 2023.
The residential supply implications matter for affordability. CBRE estimates that if the current conversion pipeline delivers as planned, the top 25 US markets will add 84,000 net new residential units from office conversions by the end of 2028. That represents roughly 4 percent of planned new multifamily deliveries over the same period. That is not enough to fix housing supply. But it is meaningful and the trend is compounding. If the conversion pace doubles again by 2027, which some analysts expect if interest rates soften further, conversions could deliver 150,000 to 200,000 units annually by the end of the decade.
For real estate investors, the practical takeaway is that Class B and C office in major urban cores is reaching a floor. Conversion demand is putting a bid under distressed office inventory. Secondary markets including Nashville should see conversion pipelines build through 2026 and 2027 as private capital flows follow the successful projects in the primary markets.