Pew Stateline

Converting Offices to Housing Is Hard. These Changes Could Make It Easier.

STATELINE ARTICLE April 20, 2023 
By: Erika Bolstad 

PORTLAND, Ore. — Stroll around America’s vacant downtowns, and a seemingly obvious solution emerges to the housing shortages and homelessness problems in many states: Why not turn all those unoccupied offices into living spaces? Especially in cities such as Portland, where the office vacancy rate in the urban core peaked at an estimated 27% earlier this year?

The answer is as complicated as the mismatched conditions producing the office glut, which began during the pandemic and accelerated in cities with a high percentage of remote workers who continued to work from home.

Nationally last year, office vacancy rates approached a 30-year high of 17.1%, according to CBRE, a global commercial real estate services and investment firm. The drop in business and foot traffic has been particularly grim in Portland, San Francisco and Seattle, but New York and Washington, D.C., also are considering ways to turn more offices into homes.

Modern high-rises lack the plumbing, exterior-facing windows and internal footprint of buildings intended for housing, making it expensive and difficult to convert some buildings. But some states are trying to promote conversions by waiving development impact fees, introducing tax incentives and streamlining zoning changes to spur office-to-housing conversions.

“We have to figure out how we can get units on the ground and how we can do that in ways that we haven’t tried before,” said state Rep. Pam Marsh, a Democratic lawmaker from southern Oregon who sponsored legislation that would require the state’s larger cities to allow commercial-to-residential conversions without mandating zoning changes or conditional use permits.

Marsh’s legislation also would require that local governments waive most system development charges, or impact fees, to help bring down their cost. Those impact fees go toward water, sewer and transportation infrastructure.

But some Oregon cities and parks districts resisted Marsh’s legislation at first because of the mandatory waiver of the SDCs. In Springfield, a town of 62,000 about 110 miles south of Portland, the planning staff was concerned about losing money for water, sewer and transportation infrastructure upgrades. Based on their feedback and that of other cities, Marsh amended the bill to allow SDCs for water and sewer in some situations. 

“We have to think innovatively,” Marsh said. “All of these things need to be on the table.”

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Excerpts from: Office-to-Residential Conversions Are on the Rise—What Does That Mean for Cities? Land Lines, July 2023

Adaptive reuse “almost always offers environmental savings over demolition and new construction,” according to the National Trust for Historic Preservation Research and Policy Lab (CRBE).  CRBE Commercial Real Estate Services estimates the cost of retrofitting one office building to apartments in Alexandria, Virginia, would be $213 per square foot, compared to $275 per square foot if it were built new. The process can be quicker, too: Developers told the Urban Land Institute that reuse can shave six to 12 months off the construction timeline.

Many of the Lower Manhattan buildings that got converted after 9/11 were prewar buildings with smaller floor plates and traditional framed window openings. They were not easy conversions, but they made a lot of sense. Some of these 1960s and ’70s buildings definitely have their challenges. Architects can still overcome those issues. For example, if the building has a large enough floorplate, you can actually create a lightwell down the center, drawing daylight deep into the building core. Such space can be repurposed in other ways, too. When Gensler was converting Philadelphia’s Franklin Tower from offices to apartments, the company decided to stack the building’s new amenities—including a Peloton cycle studio, fitness center, and theater— through the center of the building on different floors, making use of otherwise dead space deep within the building’s core. Rather than doing one amenity floor, which is quite common in a residential building, you can imagine this vertical spine of amenities that runs up through the building. During the conversion of Philadelphia’s Franklin Tower, the 1980s concrete structure was reclad in glass and aluminum, and its narrow strips of windows replaced with large windows and private balconies.

Not every vacant office tower will make a sensible conversion project. Only 10 of 84 buildings Gensler evaluated in Boston’s financial district, for example, ranked high enough to merit consideration as reuse targets.

New York’s Office Adaptive Reuse Task Force is recommending 11 policy changes that would allow for and encourage the conversion of more office buildings in more neighborhoods. Among recommendations: loosen rules to allow the conversion of most office buildings built prior to 1991 and offer property tax incentives to support the creation of affordable housing and childcare facilities in repurposed buildings.

And in Washington, DC, where some 20 million square feet of office space sits vacant and Mayor Muriel Bowser has pledged to bring 15,000 new residents to downtown in the next five years, the city will offer 20 years of tax relief to developers who convert office buildings to residences, as long as 15 percent of the homes are designated affordable to those earning 60 percent or less of area median income.

The commercial property tax base is an important part of the revenue mix in most center cities. So does converting office space lead to a major loss of revenue? Not necessarily. Though commercial buildings are often taxed at a higher rate than primary residences— 75 percent higher, on average, according to a Lincoln Institute property tax analysis of the largest cities in each state—they don’t necessarily provide the bulk of a city’s property tax revenue.  The authors of the ITEP study found that a predicted 12 to 25 percent plunge in office property values would translate to a less dramatic 2 to 4 percent dip in overall revenue in most cities.

The more fundamental issue is: What happens without these conversions? Having a high office vacancy rate if it’s permanent is a bad thing. So if the alternative is having occupied condos and apartment buildings, even if they’re paying lower property taxes, that seems like a better outcome.

Calgary, Alberta, has a head start on many cities that are just starting to explore office conversions. “We’re not going to be getting the tax revenue we could if they were fully occupied commercial spaces,” says Natalie Marchut, program manager for Calgary’s downtown strategy team. “The situation is so dire right now that some downtown buildings are assessed for their land value only, she adds. “Of course you need commercial property downtown, and of course they will always pay more to the city in tax revenue—but not if they’re all empty.  “They’re also building three bedroom units, which we don’t have much of at all in the downtown,” she notes.

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Comment:

Summarizing main points from the two articles:  

• Unused space in office buildings can be reused to help meet a demand for housing.
• Repurposing downtown buildings by bringing in more residents helps to revitalize central business districts.
• Commercial buildings with large floor plates offer an opportunity to include larger residential units than are typical in central city areas, which are in high demand.
• There are structural and cost challenges in converting office space to living space.
• But retrofitting office buildings to apartments typically costs less than new construction.
• Not all vacant office towers are economically feasible to convert.
• Some regulatory changes and economic incentives will be needed to make repurposing feasible.
• Office uses usually yield more per unit tax revenue than residential uses,
• But a fully redeveloped downtown with occupied multifamily buildings could bring more revenue than a hollowed out business district.

The Oregon legislature is considering laws requiring the state’s larger cities to allow commercial-to-residential conversions without mandating zoning changes or conditional use permits.  Also under consideration are economic incentives such as waiving certain taxes to bring down construction costs.  

But, as in all cases where tax reductions are used as an incentive to achieve a policy objective, the loss of much needed revenue is the result.  So, what often transpires is a chipping away at the incentive package or tweaking the regulations to achieve some kind of balance.  Rather than making bold moves to solve problems, our public officials seem to prefer the incremental approach.

The housing shortage is so critical, it requires visionary leadership to craft policies and methods that actually have an effect.  One solution has been around for many years and practiced in several countries as well as the state of Pennsylvania.  That is the land value tax, a differential rate alternative to the conventional equal rate property tax system.  (Note: it is not an accurate statement that “commercial buildings are often taxed at a higher rate than primary residences”.  In most states a constitutional uniformity clause prohibits classes of land use being taxed at different rates.  It is the tax revenue received that is higher.)

If the reforms that are needed to fix Oregon’s broken property tax system were to include LVT, we can expect significant results.  First and foremost, the tax is revenue neutral.  Unlike tax relief or exemptions, LVT will not result in any loss of revenue.  Just as important are the incentive effects:  The tax rate applied uniformly to building values of all properties in a jurisdiction is set lower than the tax rate on land values.  This encourages investment in building improvements, reducing the cost of office conversions, and simultaneously discourages land holding, shifting the tax burden onto underutilized sites.  It’s time for bold leadership.

Tom Gihring, Research Director

Common Ground – OR/WA