Class B Office: A Hot Commodity?

[Alexander Szikla]

Manhattan's Class B office buildings have unexpectedly become the city's most coveted leasing opportunity just as this inventory begins to disappear. With premium Class A towers reaching near-capacity, leasing momentum has cascaded into B-plus properties—those older, well-located buildings with just enough upgrades to attract quality tenants.

The numbers tell the story: these spaces recorded an impressive 8 million square feet leased in Q1 2025, representing the strongest post-pandemic performance and exceeding the 10-year average by nearly 25%.

This surge comes at a critical moment as recent zoning changes and tax incentives accelerate office-to-residential conversions, with Class B buildings bearing the brunt of this transformation. More than 6.5 million square feet have already been converted since 2020, and pending projects could triple this figure in the coming years. These conversions not only reduce available inventory but often displace existing tenants, further intensifying competition for remaining space across the market.

The tightening supply is evident in the data—sublease availability has declined for eight consecutive quarters, reaching just 3.33 million square feet, its lowest level since July 2020. With fewer companies relinquishing space and more implementing return-to-office policies, Class B availability is evaporating quickly. This trend mirrors the broader U.S. office market revival, which saw approximately 115 million square feet leased in Q1 2025—up 13% from the previous quarter and the highest quarterly total since mid-2019.

The financial calculus makes these properties particularly attractive for tenants, as Class B spaces rent for up to $25 per square foot less than Class A properties in prime areas like Midtown South. However, this affordability poses challenges for landlords as tenant expectations evolve. Today's occupiers demand turnkey buildouts that push landlord costs toward Class A levels, squeezing margins for all but the most well-capitalized owners and creating a precarious balance between demand and profitability in this segment.

Major tenants are validating this trend with substantial commitments. Amazon (via WeWork) has secured 303,741 square feet, while IBM has taken 92,663 square feet at One Madison. Horizon Media has made perhaps the most significant statement with a 360,000-square-foot, 17-year lease commitment. Even traditional firms like Goodwin Procter have embraced the B-building renaissance, leasing 250,000 square feet in a 116-year-old property. BuzzFeed, Capital One, A&E, and even the Archdiocese of New York have made similar moves, underscoring the broad appeal of these properties across diverse industries.

Yet this promising recovery now faces significant headwinds. The administration's renewed tariff threats—particularly targeting China—have stoked recession fears, causing many firms to pause their leasing plans. Brokers report a growing reluctance to commit to long-term leases with economic uncertainty looming. This hesitation could derail momentum just as landlords were beginning to regain leverage. Beyond immediate economic concerns, structural challenges persist: obsolete buildings, sluggish conversion efforts, and an oversupply of underused space continue to plague the market. Many potential office-to-residential conversions remain on hold due to prohibitive capital costs.

While Class B space currently reigns as Manhattan's hottest commodity, the sustainability of this trend remains an open question. The business model faces thin margins and depends heavily on capital-intensive upgrades that not all property owners can afford. Any technology sector pullback or broader economic slowdown—potentially triggered by trade tensions—could rapidly cool this momentum. For now, only landlords with robust balance sheets are positioned to weather these crosscurrents, potentially creating a widening gap between successful and struggling properties within the same classification. Industry veterans are advised to proceed with caution as 2025 unfolds.