The COVID-19 pandemic has drastically changed the way we work and live, with remote work becoming the norm. As a result, the demand for downtown real estate, especially office spaces, has plummeted, leaving many downtown areas struggling to survive. However, this is not the first time cities have faced such a crisis. In the wake of the 9/11 terrorist attacks, Manhattan's Financial District and other high-rise districts across the country questioned whether they could ever recover. But within a few years, these central business districts refilled with workers and activity.
As we face a similar crisis today, many are pushing for the conversion of vacant office spaces into housing as a key strategy for addressing these challenges and revitalizing downtowns. The argument is that as remote work is here to stay, office demand will never fully return to pre-pandemic levels. Therefore, the unused office spaces can be repurposed into what cities currently need: housing. Moreover, some argue that the expense and complexity of conversions justify public sector intervention and subsidy.
However, it raises a fundamental question of whether the current high office vacancies are a market problem whose burden falls on the private sector or a market failure and policy problem to which the government must respond. In a report by the Urban Land Institute, they argue that office-to-residential conversions are one potential remedy, but the public interest in conversion and the potential beneficiaries must be clearly defined to justify any public financial support.
While office-to-residential conversions are one tool in a much broader toolkit for downtown revitalization, it is still early in the shift to hybrid work, and many market forces have yet to play out. Therefore, governments rushing to provide financial support for conversions could inadvertently subsidize the wrong behavior.
The report identifies the five common arguments made by proponents for converting offices into housing and evaluates the myths and realities of each argument, using data from cities across the United States. It concludes with six recommendations for what cities should do about conversions and what other long-term strategies they could adopt.
Office-to-residential conversions are one potential remedy in some circumstances, but the public interest in conversion and the potential beneficiaries must be clearly defined to justify any public financial support. It is still too early to determine the full impact of the shift to hybrid work, and governments should carefully assess the situation before rushing to provide financial support for conversions.
Common Arguments for Converting Offices into Housing
The COVID-19 pandemic has upended many aspects of our lives, including the way we work. With a high percentage of office workers now working remotely, downtowns and office buildings have become largely empty. As a result, there have been many arguments for converting empty or near-empty office buildings into housing to add much-needed foot traffic and breathe new life into downtowns and cities.
Here are some common arguments for converting offices into housing:
Offices are Over - with most employees with office jobs opting for the flexibility of working from home and the convenient option of avoiding difficult commutes, it's thought that few employers will require workers to return to the office full time. This has led many to believe that the demand for office space will permanently decrease.
Too Many Offices are Bad - downtown central business districts that proliferated in the mid-20th century are largely single-use office districts. Many view these areas as a monoculture and anachronistic, and no longer appropriate for the dynamic nature of work in the 21st century.
Mixed Use is Better - the lack of housing and residents make traditional central business districts inactive in the evenings and on weekends. By adding more residents downtown, smaller businesses like grocery stores, hardware stores, cafes, and restaurants would benefit and bring more life to the area.
Cities are About to Go Broke - declining office building valuations threaten local government revenues, as lower office values reduce commercial property tax receipts. Converting offices into housing will allow cities to maintain or increase property values.
Office Conversions Can Solve the Housing Crisis - proponents argue that amid the ongoing nationwide housing shortage, converting offices to residential buildings can be an important part of meeting those needs.
While there is some evidence that office-to-residential conversions make sense given the number of successful projects already completed in cities across the U.S, the critical questions now are:
Should the public sector intervene to catalyze more conversions?
What kind and how much intervention is needed?
Are there any potential unintended consequences that could negatively impact cities and metropolitan regions in the long run?
Ultimately, if conversions are not the most effective or needed tool for downtown revitalization, what is?
Six Real Estate Recommendations for Revitalizing Downtowns
The urgency of solving the housing crisis and revitalizing downtowns has prompted unprecedented interest in the conversion of office spaces into residential properties. However, the notion that office-to-residential conversion is a panacea for all related challenges needs to be dispelled. To fully address the challenges, several other ideas and considerations must come to the fore. Below are six recommendations that could help leaders address multiple challenges more effectively.
1. Make it easier to build new housing in downtowns and surrounding neighborhoods.
Adding housing in and around downtowns is a logical strategy for cities, as it increases market demand for office space. Regulatory relief for building new housing on vacant or underutilized lots could generate more new housing than conversions. Cities can take advantage of opportunities presented by existing zoning to allow for housing as-of-right for all income levels within downtowns.
2. Provide tax incentives for new construction and conversions alike.
Cities should offer tax incentives only for both new construction and conversions. Prioritizing new construction helps cities determine the optimal amount and type of incentives needed to facilitate conversions. Carefully structured incentives for new construction should avoid tearing down historic buildings.
3. Consistently distinguish between tax abatements and other forms of direct subsidies.
Cities should only use foregone tax revenue for public funding of conversions, and not award direct subsidies. Direct subsidies could prove detrimental in cases where property owners aren't pricing their rentals competitively. Tax abatements or tax-increment financing should be used for place- or project-specific foregone tax revenue to incentivize affordable housing production for a more inclusive downtown. Tax incentives may need amendments to enable REITs to access them.
4. Identify opportunities for conversions in all districts, not just downtown.
Surplus, dated, and obsolete office spaces exist not only in downtowns but throughout metropolitan regions. Converting offices in locations far away from the strongest job centers, and consolidating jobs in the remaining centers, makes more sense to prompt office conversion. Local or federal incentives should not exclusively target downtown areas.
5. Increase Flexibility in Building Use
Cities need to make it easier to convert any building to another use, from entertainment and co-working spaces to advanced manufacturing and experiential retail. Streamlining approval processes, reducing unnecessary fees and zoning reforms are all necessary steps that can increase the ease of conversion and flexibility in building use. Land value taxes, vacancy taxes and tax incentives for conversion should also be made available to promote the adaptive reuse of commercial real estate.
6. Leverage Downtowns’ Locational Advantages
Housing and adaptive reuse are only one part of the downtown revitalization toolkit. Cities should focus on improving the overall quality of life and emphasizing downtowns as a place of diverse destinations that draw visitors, residents, and workers from across the city and region. Prioritizing downtown as a place of diverse destinations, including arts, entertainment, work, health care, retail, and higher education facilities to generate demand for office space are all critical for downtown revitalization.
Conclusion
In summary, the conversion of office spaces to residential spaces can be a viable option in certain circumstances, but it is crucial that cities approach this process with caution and foresight. Moreover, conversions should not be considered a substitute for the broader efforts that cities must undertake to enhance the appeal and accessibility of their downtown areas.
To revitalize downtowns, cities need to adopt an "all-hands-on-deck" approach. Hasty attempts to address the challenge of office vacancies through a one-size-fits-all conversion solution could create new problems. This is a pivotal moment to acknowledge the distinct advantages of centrally located, economically productive, and densely populated downtowns as sites for employment, social activities, and living spaces. Moving forward, it is imperative that we innovate and implement imaginative strategies to guarantee the ongoing vitality and significance of our downtown areas.
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