"The office market is starting to gain enough momentum in the next couple years where we're going to see office market become a better value than residential conversion," said Josh Kuriloff, a senior broker at Cushman & Wakefield.
For Mayor Bill de Blasio, the challenge is to balance the need for more affordable housing with the need to increase the number of jobs, which depends on having enough office space for startups or relocations.
"Ensuring that there is adequate office supply for growing industries is critical," said Thomas McKnight, an executive vice president at the city Economic Development Corp. "At the same time, we want to make sure there are adequate housing opportunities."
Some planners have been concerned about the decline of cheap office space in older properties, which are known in the real-estate industry as Class B and Class C buildings. They think it might put a damper on the growth of startup companies in the city's hottest business sectors.
A study released in December by the city's Economic Development Corp. estimates that high-growth companies will need 17 million square feet of space in the next 11 years, to 2025. During the same period, the report predicts, the amount of space in Class B and Class C properties could shrink by 7.8 million square feet—in part because of conversions.
If these projections come true, the study warns, high-growth companies "may have fewer affordable options for New York City office locations and may have to consider alternative office markets."
The city used to encourage conversions. During the 1990s and early 2000s, it offered incentives to downtown landlords who converted commercial buildings into residential units.
"By all accounts, it was wildly successful—almost too successful," said architect Vishaan Chakrabarti, who is a professor at Columbia University and is a partner at SHOP Architects. "Generally what happens in our marketplace, residential is so much more attractive than commercial that it sort of devours all the space."
Those incentives have expired, and Mr. Chakrabarti said he hopes the city will now consider programs to preserve and update Class B and Class C office space.
"We don't want to lose all of our old office buildings to residential conversion," he said. "We're going to run out of space for these startups."
But the appeal of conversions is declining for developers, too, as demand drives up office rents. The average asking rent for a Class B and Class C office building was $45.93 a square foot in the first quarter, up 5% from a year earlier and 15% from 2010, according to data from the real-estate research firm Reis Inc.
In 2012, private-equity firm Savanna purchased two loft-style buildings, at 245 and 249 W. 17th St. in Chelsea, with an eye toward converting them into high-end housing. At the time, Eastern Consolidated, the broker on the deal, projected office rents of $60 a square foot for the buildings.
Savanna ultimately decided to keep the buildings as office space; rents are now above $70 a square foot, according to Peter Hauspurg, chairman and CEO of Eastern Consolidated. Twitter signed on as a tenant in January.
Eastern Consolidated also brokered the long-term lease at a former garage at 430 W. 15th St., in the heart of the Meatpacking District. The developer, Atlas Capital, considered converting the space to a hotel but settled on office space and could get as much as $80 a square foot in rent, Mr. Hauspurg said.
"When the rents were $40 to $50 a square foot, it wasn't even close that anyone would consider office," said Mr. Hauspurg. "It was only when things got up to the $80 a square foot market that the developers said, 'Wow.' "
