One by one the old buildings in the city have been demolished and replaced with modern glass towers.

one 是数词，表示"一个"。 by 在这里表示"逐个地"或"依次地"的方式。 one by one 是一个固定短语，意思是"一个接一个地"，表示事物按顺序逐个发生或处理。