Office to Residential Conversions: Two Birds with One Stone
Remote work is reshaping traditional downtowns in cities across the United States. Businesses have cut back on the amount of office space they need, and workers have also adapted their homes to accommodate more flexible work arrangements. However, while demand for downtown commercial space has fallen, demand for housing in these areas remains strong. In addition, these same cities are facing housing shortages and affordability challenges. As a result of these concurrent trends, landlords, housing advocates, and policymakers alike are equally enthusiastic about the possibility of converting office buildings to residential uses which, in theory, will remove some excess supply from the office market and add to the housing supply.
Successful efforts such a range of conversions of turn of the century office buildings in Chicago, an ambitious conversion that cut an internal courtyard through a former office building on Water Street in New York City, and affordable housing conversions in Kansas City and Baltimore have led numerous cities to consider whether their office stock, regulations, and market dynamics were suited to attract this type of activity.
While a material number of conversion projects are underway, in many locations this approach has run into a range of practical challenges, including:
- Logistics Issues: The physical design of office buildings is not always conducive to residential uses, and office to residential conversions are a niche practice, making expertise scarce.
- Policy hurdles: Municipal and state-level building, health of safety regulations (typically written without conversions in mind) can constrain options or add cost.
- Financial Challenges: Residential uses that include affordable housing may struggle to yield rates of return that justify conversion costs, particularly when current financing rates are generally higher than debt on existing buildings.
New York’s Adaptive Reuse Task Force
In 2022, ESI supported the New York City Department of City Planning and the Office Adaptive Reuse Taskforce to study the logistical, regulatory, and financial hurdles to office conversions in Manhattan. This study advanced recommendations to make existing conversion regulations work better, provide financial incentives for affordable housing and childcare facilities, and expand the range of buildings eligible for the most flexible conversion regulations. Specifically, the study recommended that regulations currently applicable to buildings built before December 1961 should be extended to all buildings built before 1990, exempting these buildings from restrictions developed in the interim years.
While these regulatory changes would improve the chances of successful adaptive reuse, the study noted that the necessary condition for reuse projects remains financial viability. Summarizing our findings on a prior Present Value blog post, we wrote:
Office to residential conversions make good urban planning sense. With the right zoning regulations, tax incentives, and financing options, office-to-residential conversions can help meet the demand for housing, help remove excess vacancy from office markets, and bring more foot traffic to neighborhoods that have been struggling since the pandemic began three years ago. However, unless heavily incentivized, office conversions are likely to remain relatively uncommon.
Leveraging Federal Incentives
Recognizing the need for incentives to encourage this type of development, the White House announced in late 2023 a multi-faceted effort to use federal incentives across several agencies and programs to encourage residential conversion projects. Most significantly, the Department of Transportation has released new guidance that enables the Transportation Infrastructure Finance and Innovation Act (TIFIA) and Railroad Rehabilitation & Improvement Financing (RRIF) programs to be used for transit-oriented development projects. These two programs have more than $35 billion in combined available lending capacity at below-market interest rates, with the potential to change the economic viability of qualifying projects. These are the most notable of more than twenty federal loan, grant, tax credit and technical assistance programs across seven agencies that can be used to convert commercial properties to residential use.
Whether (and where) these incentives are robust enough to facilitate development will depend in large part on local conditions and local policymakers. While early experience has demonstrated that conversions are not a “silver bullet” for a struggling office market, a city tax base or an affordability crisis, these federal inducements present a fresh opportunity for localities to consider this strategy.
Relevant considerations on the feasibility and desirability of conversions will continue to include residential and office market conditions, regulatory restrictions or considerations, alignment with economic development and recovery strategies, the relationship to neighborhood redevelopment and revitalization efforts, and broader public transit and transit-oriented development plans.
ESI’s urban economic focus sits at the intersection of many of these issues, which are vital to the present and future health of cities. Our experts regularly help municipalities, transit agencies, economic development organizations and developers think through these opportunities. If you are interested in learning more or have questions regarding adaptive reuse, contact our team below.
Ethan Conner-Ross is a senior vice president and principal at ESI. His practice areas include public policy, transportation, tourism, economic development, and strategic planning. Mr. Conner-Ross is an experienced project leader who brings cross-disciplinary skills and a public sector perspective to his engagements. He has led a range of projects for ESI helping governmental, quasi-governmental, and private sector organizations maximize and articulate public benefits.
David Stanek, Ph.D., a vice president at ESI, is an urban planner who specializes in combining data science techniques, geographic information systems, and qualitative research methods to evaluate the role and influence of transportation and land use interventions on residents, places, and municipal budgets. Prior to joining the firm, he was a land use and zoning researcher at the Penn Institute for Urban Research.