Office-to-Apartment Conversions Hit a Record as Chicago Passes Manhattan

The Signal:

• Obsolete office is being repriced into its next use, not rescued in place.
• The conversion wave is now a measurable housing-supply channel.
• Municipal incentives are steering where the capital lands.

The office recovery has been a flight-to-quality story — the top tier tightens while the bottom stalls. This is what happens to the bottom: 90,300 units of conversion in 2026, up 28%, as obsolete office gets repriced into housing rather than waiting for a demand that is not coming.

The city ranking is the counterintuitive part. Chicago overtaking Manhattan as the top conversion market reflects basis: nearly 60% of Chicago office has traded at a discount since 2024, and a low enough basis is what makes the hard math of conversion pencil.

The structural read is a two-track office market resolving in real time — quality space re-tightens while functionally obsolete space exits the office category entirely. Municipal conversion incentives are the accelerant deciding which cities capture the units.

Implications: Owners of obsolete office should model conversion basis, not stabilization — the exit may be a different property type. Developers with conversion capability gain a supply channel where land is effectively pre-assembled. For cities, incentive design is now a housing-supply lever. For lenders, discounted office basis is what unlocks the conversion math on stranded assets.