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Converting Vacant Offices to Housing: Challenges and Opportunities

The recent global pandemic upended so many aspects of American life. As employers largely adopted remote and hybrid work, downtowns once bustling with office workers became a thing of the past. Now hundreds of office buildings across the country sit empty or underutilized. According to a recent estimate, 12.5% of office space is vacant across the nation, with nearly 1 billion square feet in total vacant office space, indicating an oversupply of office buildings. About 35% of workers who can do their job from home were still working entirely remotely as of March 2023, with an additional 40% now on a hybrid schedule, only going to the office some of the time.

Despite this trend away from the office, newer, higher-end office space is still desirable, and tenants are willing to pay for it, shifting to smaller offices with more amenities as their old leases expire. Office vacancies in older buildings will likely continue as demand for office space is expected to remain below pre-pandemic levels—presenting an opportunity to convert these buildings into housing.

Opportunities for Commercial-to-Residential Conversions

By converting offices to housing, cities can leverage existing buildings and transform them to meet today’s housing needs without having to demolish and rebuild from scratch. In many cities, zoning and land use restrictions place limits on building new homes in locations near where residents work. Vacant offices provide space for new housing in those areas. Converting existing buildings rather than building new ones has the added benefit of being less likely to elicit opposition from current residents who might be concerned a new development going up near their home could change the neighborhood’s character or impact property values.

Repurposing existing buildings also has the potential to save developers time and money, depending on the project. Converting existing buildings can be cheaper and quicker than building from the ground up, even when converting older buildings that require updates. Estimates for how much cheaper vary, as any potential savings depends on the original structure of the building. Good candidates for conversion to residential—especially smaller, pre-war buildings with more natural light, higher ceilings, or operational windows—may be as much as 30% cheaper to convert than to demolish and rebuild. However, office buildings that are not well-suited to conversions can be significantly more expensive to convert than starting from scratch with a new construction project. The time savings associated with office conversions can also be substantial: According to a report from the Urban Land Institute and National Multifamily Housing Council, developers say conversion projects can take six to 12 months less than constructing a similar property from the ground up. Conversion can also use fewer materials than a new development and therefore have a smaller carbon footprint than new housing projects. Reusing concrete, for example, can avoid the release of millions of pounds of carbon dioxide per building.

Office conversions can also improve the financial condition of both commercial landlords that are losing revenue and local governments which rely on property taxes to fund city services that make downtown neighborhoods appealing areas to work and live. Without the property taxes from commercial office spaces, cities may be forced to cut back or eliminate services, which could bring further decline in economic prosperity in central business districts, a process that is referred to as the “urban doom loop.” New residents moving into recently converted housing could help to support downtown businesses and offset lost property taxes from empty offices. Increasing the number of office-to-residential conversions would also lead to more mixed-use spaces in downtown areas, making them more resilient to future changes.

Challenges and Limitations

While there are multiple examples of successful adaptive reuse projects, significant challenges prevent the number of office conversions from taking off.

Structural differences: In general, office buildings are fundamentally different from multifamily housing in structure, and the potential for residential conversion varies widely. By some estimates, only 3% of New York City office buildings and 2% of those in downtown Denver are suitable for residential conversions. From changes to plumbing, to electrical configurations, and to unit layouts, turning offices into apartments is rarely a straightforward transformation. For example, office buildings tend to have far fewer bathrooms than are necessary for apartment buildings and tend to have deeper and wider floor plans with an abundance of space far from natural window lighting. There are also different building codes for offices and residential buildings, so additional changes can be necessary to ensure that a building meets those code requirements.

High costs: The extensive physical changes that may be necessary can drive up costs, making it less appealing for developers. The costs associated with making those physical changes can range from $100 per square foot to over $500 per square foot, depending on the details of the building design. Despite increased office vacancy rates and continued demand for housing, CBRE estimated that in 2022 the average net operating income for office buildings was only $0.50 per square foot less than for multifamily housing. Because there’s such a small difference in the value of an office building compared to a residential building, there’s little financial incentive for developers to take on those conversion costs, and these projects are rarely financially feasible without subsidies.

Slow process to greenlight projects: In addition to the physical changes required, many areas that are zoned for commercial office buildings are not zoned for residential buildings, and getting approval for a zoning variance that allows residential use of a building can be a lengthy process. Buildings with multiple tenants also require an owner to wait for all the tenant leases to expire before they can sell it to a developer or begin a conversion project, extending project timelines.

Lack of neighborhood amenities: In many cities, housing supply has been so outpaced by demand that adding new housing anywhere will help. However, many downtown areas lack certain neighborhood amenities, such as schools or grocery stores, that would make them desirable places to live. In addition to considering how to increase the construction of new housing units, allowing development of diverse businesses is vital for these office conversions to be successful.

Even if cities are able to overcome these challenges and complete widespread conversions, office space alone will not be nearly enough to meet most cities’ housing needs. Downtown areas are generally a small fraction of land in U.S. cities. For example, San Francisco recently set a goal of creating 82,000 new housing units within the city by 2031, but research put the number of potential units that could be created by converting vacant office space at approximately 11,200—a step in the right direction, but by no means a silver bullet to solve the housing shortage.

How Cities and States Are Incentivizing Commercial to Residential Conversions

Due to the importance of increasing housing supply and maintaining vibrant downtowns, some cities and states have started to implement policies to address some of these challenges and incentivize more developers to consider conversions. Approaches include the creation of tax credits, grants, no-interest loans, and exemption from certain zoning requirements to reduce cost burdens and simplify extensive bureaucratic requirements that slow down the conversion process.

New York City, NY: In 1995, NYC established a tax abatement, known as 421-g, to encourage office-to-residential conversions in the Lower Manhattan area. By 2006, 13% of Lower Manhattan’s office space had been converted to residential, which resulted in nearly 13,000 new housing units. Now faced with empty offices again, Mayor Eric Adams recently released recommendations from the city’s Adaptive Reuse Task Force that suggest creating a new tax incentive for office conversions that include affordable housing or child care facilities.

The recommendations also included rezoning parts of downtown Manhattan that do not currently allow residential buildings, as well as streamlining and updating conversion regulations to make the process simpler and expanding eligibility for this simpler conversion process. Currently only office buildings in NYC’s Financial District or those built before 1962 are eligible for those flexible regulations that make office conversions easier. The proposal recommends extending that eligibility to additional commercial districts throughout the city and to buildings built before 1990. It would also eliminate off-street parking requirements for conversion projects.

Chicago, IL: Last fall, the city of Chicago requested proposals for conversion projects for LaSalle Street in downtown Chicago and recently announced five projects that were selected. Together the projects will create more than 1,600 new residential units, approximately 600 of which will be reserved for households with incomes that are 60% of the area median income. The city is offering tax increment financing for the residential projects as well as grants for ground-level businesses that will be needed to support residents, such as grocery stores. Most of the projects will also utilize the Low-Income Housing Tax Credit (LIHTC) and historic tax credits for funding.

Washington, DC: The District has one of the highest rates of remote work, partially due to the number of federal workers in the area. Downtown DC currently has about 25,000 residents, while it has the capacity to hold 240,000 office workers. Residential space in downtown DC currently has a 3% vacancy rate, while the commercial vacancy rate is at 17%. The city has introduced the Housing in Downtown (HID) Abatement to encourage conversions of underutilized office space. The program will provide a 20-year property tax break to developers converting commercial spaces to residential space.

As part of the plan, the city also relaxed regulatory requirements for relevant projects, including exempting them from the requirements of DC’s First Source law, which requires that a certain percentage of the construction workers hired on a project that receives government funding be DC residents. The HID Program also waives requirements of the Tenant Opportunity to Purchase Act (TOPA), which requires landlords to offer tenants the first right to purchase a building, for the first 10 years after a conversion. The city emphasizes that this will allow projects to move forward more quickly, but the move has been criticized as loosening important requirements that were not preventing development.

California: In 1999, Los Angeles passed its Adaptive Reuse Ordinance, which allows for a more streamlined review process and exemption from certain zoning requirements for adaptive reuse projects of downtown buildings built before 1974. It led to the development of 12,000 new housing units in downtown LA over 20 years. Now the city is working on an updated version of the ordinance that would apply to buildings throughout the city that are 15 years old or older.

Meanwhile, California has allocated $400 million over the next two years to incentivize more conversions throughout the state. The state legislature’s proposed Office to Housing Conversion Act would limit the review process and relevant fees for conversion projects, as well as prevent any additional parking requirements, as long as the project reserves 10% of the residential units as affordable housing. The state has also seen success in encouraging the conversion of hotels and motels into new housing for unhoused residents through the Homekey Program, which provides grant funding to eligible projects. In the three years since it was first implemented, the program created almost 12,800 units.

Wisconsin: Wisconsin legislators passed a bipartisan bill in June 2023 that created a loan fund to help developers cover the costs of converting vacant commercial buildings to affordable or senior housing by providing interest-free loans of up to $1 million. Any new housing created using these loans will be required to be maintained as affordable or senior housing for at least 10 years.

In other areas without specific office-to-residential incentives, developers have utilized existing tax credits to make conversion projects pencil out. Many states offer a historic tax credit, which can be used for adaptive reuse projects such as office conversions. For example, Missouri’s historic tax credit program has made it possible for many of Kansas City’s older office buildings to be converted into residential buildings. Similarly, recent office-to-residential projects that will create approximately 1,500 new units in Dallas, TX have made use of the historic tax credit available in Texas.

Considerations for Federal Policymakers

Office-to-residential conversions are challenging and only have the capacity to provide a modest amount of housing relative to the nation’s immense housing needs. Still, federal policymakers should examine all feasible avenues for increasing housing supply. Although some office-to-residential conversions can be costly and time-consuming, cities and states have nonetheless identified significant benefits that have encouraged them to develop creative solutions to turn vacant buildings into much-needed housing.

The Biden administration has announced a new interagency working group focused on finding ways to support office-to-residential conversions with federal funding. As part of this effort, the General Services Administration (GSA) will identify underutilized federal office buildings that are well-suited to conversion. The federal government owns over 500 million square feet of office space, and a recent GAO report found that 17 out of 24 federal agencies were using an average of only 25% or less of their current office space. HUD has also released a notice of funding opportunity announcing a study of post-pandemic office-to-residential conversions. Because these conversions often do not pencil out without subsidies, Congress should evaluate how to further incentivize conversions where they are feasible and would have a meaningful impact.

The Revitalizing Downtowns Act (S. 2511 and H.R.4759), introduced in both the House and Senate during the 117th Congress, would create an office conversion tax credit for commercial office buildings built at least 25 years before their conversion. The proposed tax credit would be applicable to new uses beyond purely residential, including mixed-use buildings, which are essential for creating resilient neighborhoods and typically include some residential units. The bill previously garnered only Democrat support and has not yet been reintroduced in the 118th Congress.

Expanding LIHTC could also be an effective way to reduce some of the financial burden preventing office conversions from being financially feasible while also ensuring projects that utilize the tax credit would include affordable housing.

Given the state of the housing shortage, members of Congress should work together to find opportunities for bipartisan action. Congress could hold a series of hearings to further investigate the opportunities underused office space presents for more housing across the country, as well as the role that federal policy could play to alleviate some of the challenges associated with conversion projects.

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