A Tale of 3 Cities: Exploring Boston, SF And NYC’s Office Markets, Plans For Development And What They Mean For The Future

The U.S. commercial real estate market was rocked by the pandemic, which led to challenges ranging from stalled construction projects and supply chain disruptions to vast office vacancies that persist today. Major cities were hit hardest by these changes, with large, empty office buildings putting a drain on local downtowns and people fleeing the urban multifamily market in search of more space. 

As the years have passed, there has been some return to normalcy. Urban migration is back to prepandemic levels as Americans move back to city hubs and office markets are slowly recovering on a case-by-case basis. But what does that look like in action? How are some of the most prominent markets faring, and what are local leaders doing to encourage continued growth? 

To answer this question, Michael Scott, Nutter’s Co-Managing Partner, spoke with Bisnow about some of the trends happening in New York, San Francisco and Boston. Scott walked Bisnow through the first-quarter office numbers in each city, as well as some of the key policies they have in place to encourage development, and what those policies may mean for the future of commercial real estate. 

New York 

As of Q1, the NYC office market was showing positive growth. Manhattan leasing activity grew by 11.6% to 11.4M SF, representing the city’s strongest quarterly leasing volume since Q4 2019. Additionally, average asking rents increased by 1.5% to $74.53 per SF, and the city experienced its tightest availability since February 2021. 

Franklin Wallach, executive managing director of research and business development at Colliers, told Bisnow that the two key factors driving this increase are a strong demand for trophy and Class-A office space and landlords removing office space from the market for conversions. 

“According to the information provided by the NYC comptroller, occupied space in the highest quality buildings grew by approximately 11.5M SF since 2019. However, the rest of the market declined by 43M SF over the same period,” said Scott. 

Meanwhile, the city is working on a plan for the Class-B and C office properties that are less desirable to today’s tenants. A rezoning proposal titled the Midtown South Mixed-Use Plan would allow large swaths of the neighborhood — 42 blocks — around Penn Station, the Port Authority Bus Terminal, Herald Square and Bryant Park to be converted into residential housing. The plan, if approved, could create nearly 10,000 new homes, including up to 2,800 permanently income-restricted affordable homes. 

“The Midtown South Mixed-Use Plan is a significant update to zoning, allowing new residential housing in Midtown that encourages adaptive reuse of existing building stock and allows for meaningful density,” Scott said. “This plan should provide a more vibrant mix of uses in Midtown, and, with the enactment of 467-m, a new exemption from the city’s property tax for office-to-residential conversions, it will provide an alignment of economic incentives for more office-to-residential conversion projects.”  

Nutter partner Jon Popin said that the Midtown South Mixed-Use Plan, once enacted, will be a plan of “firsts.”  

“It will be the first time that decades-old Manhattan industrial areas will allow for badly needed residential development,” he said. “It will also implement for the first time newly created zoning districts that will allow residential towers of up to 18 FAR. This exciting change to New York City’s Zoning Resolution will serve to bring much-needed housing to an area of the city that has historically focused on solely commercial and industrial uses.” 

San Francisco

Not unlike NYC, San Francisco’s commercial real estate market seemed to reach a turning point in Q1, with new leasing activity and increased tenant demand. Leasing activity reached 2.8M SF, up from 2.7M SF in the previous quarter, and, similar to NYC, the majority of tenants were gravitating toward new and trophy office buildings. Despite this, several major company relocations led to a slight uptick in vacancy rates. 

In September, Bisnow reported that San Francisco’s artificial intelligence market had driven a lot of the office market activity in the last few quarters. A spokesperson for CompStak said tech, advertising, media and information, or TAMI, tenants had fueled relocations, accounting for 43.7% of Bay Area moves.

“Although San Francisco activity has increased, it continues to have the highest vacancy rate in the country at 34.8%, as compared to 16% in NYC,” said Scott.

The San Francisco Planning Department has proposed new types of zoning for the city's eastern neighborhoods to not only promote more residential development but also industrial and retail development. Areas currently zoned for only residences will stay the same, with plans to encourage development around transit hubs, while there will also be zones to ensure space for new and existing production, distribution and repair businesses. Additionally, there is a proposal for a variety of different mixed-use zones with both residential and retail spaces. 

As compared to NYC, where office-to-residential conversions are accelerating after changes to the tax and land use codes — totaling up to 15M SF since 2020 — very few conversions are happening in San Francisco, Scott said. 

"San Francisco has recently enacted programs aimed at increasing conversions, such as waiving inclusionary housing requirements and impact fees up to 7M SF of converted space, waiving transfer tax on up to 5M SF of converted space, and other measures related to clarifying building and fire codes and streamlining permitting,” he said. “Clearly, more is needed in San Francisco to encourage developers to undertake conversion projects.” 

Boston

The Boston office market also saw a partial uptick in Q1, but its growth appears to be less robust than NYC and San Francisco. Quarterly leasing activity totaled 1.4M SF, a 25.9% increase over Q4 2024. However, average asking rents declined for the third consecutive quarter to $47.62 per SF, and vacancy rates ended the quarter 40 basis points higher than where they began at 17.5%. 

One potential issue driving this vacancy rate is the fact that two large office projects, Hines’ 691-foot-tall South Station Tower and Boston Global Investors' 10 World Trade, which are both expected to be completed this summer, remain largely unleased. Boston Global Investors Vice President John Hynes IV spoke to Bisnow in April and said that 10 World Trade has seen an increase in touring in the last six to 12 months, and while it hasn't signed any tenants yet, he is optimistic it will soon.

In Boston, the key plan driving development is Imagine Boston 2030. Among the many proposals in this plan's sweeping agenda is a plan to encourage dense, walkable, mixed-use development to create a mixed-use core in the city where people can live, work and play. The plan calls for more than 53,000 housing units to be added to the city by 2030, approximately a quarter of which could be accommodated in the core, and 20M SF of new space for work. Imagine Boston was created before the pandemic, however, and the city’s needs may have shifted since. 

“The tension in today’s market — with higher interest rates, construction costs, restrictive zoning, significant inclusionary housing requirements and other impact fees and regulatory costs — is that construction of large-scale housing projects are not able to overcome necessary financial hurdles, and many are not economically feasible. Projects of scale — new construction or office-to-residential conversion — require a return on cost of at least 6+% to attract the requisite capital to fund construction,” Scott said. 

Projects moving forward in an urban setting in this market are largely those that receive subsidies and property tax abatements, similar to those being implemented in NYC. 

“Policymakers must have a detailed understanding of the financial anatomy of these larger projects so that they have a clear-eyed understanding of the variables needing to be solved to make projects viable,” Scott said. 

As each city continues to find ways to move forward despite market uncertainty and challenges, developers will need the right partners by their side.

“New construction and office-to-residential conversions are complicated and very expensive. More needs to be done in San Francisco and Boston, similar to the 467-m program and zoning reforms enacted in NYC, to create more housing in both cities,” Scott said. 

This article was produced in collaboration between Nutter and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.