PD&R Quarterly Update: Facilitating Successful Office-to-Residential Conversions

PD&R Quarterly Update: Facilitating Successful Office-to-Residential Conversions

At HUD's recent Quarterly Update event, held July 25, 2023, panelists discussed the methods for conducting office-to-residential conversion projects and successful strategies at the local level.

On July 25, 2023, HUD’s Office of Policy Development and Research (PD&R) hosted a PD&R Quarterly Update event that featured two panel discussions examining the opportunities, challenges, and local approaches surrounding office-to-residential conversions. Aaron Shroyer, senior advisor at PD&R, moderated the first panel discussion between Phil Aftuck, director of investments at The Bernstein Companies; Steven Paynter, principal at Gensler; and Steve Smith, principal at Cooper Carry. Kera Package, chief of staff at HUD’s Office of Community Planning and Development, moderated the second panel, which featured Sean Campion, director of housing and economic development studies at Citizens Budget Commission; Maurice D. Cox, commissioner in the City of Chicago’s Department of Planning and Development; and Yesim Sayin, executive director at the D.C. Policy Center. The event also included an update on U.S. housing market conditions from Kevin Kane, chief housing market analyst in PD&R’s Economic Market Analysis Division. Tracy Hadden Loh, a fellow with the Anne T. and Robert M. Bass Center for Transformative Placemaking at the Brookings Institution, delivered the keynote remarks.

Making Office-to-Residential Conversions Possible

In her remarks, Loh highlighted the factors that have led many cities to examine alternative uses for obsolete and underused retail and office buildings. She noted, for example, that shopping malls in vehicle-dependent areas of the U.S. are becoming outdated, and the demand for more retail in walkable areas is growing. Increased remote work due to the COVID-19 pandemic brought another demand shift as companies’ needs for brick-and-mortar office space declined. At the same time, household structure and demographic change fueled demand for “new forms of housing and more walkable, vibrant communities in which to live, work, and recreate,” said Loh. These shifts present unique opportunities for cities to remake their downtowns.

Determining whether buildings are suitable for residential conversion is a critical first step for cities and developers. Paynter and his team at Gensler developed an algorithm based on five factors: proximity to transit and pedestrian routes; building shape; floor plate; building envelope; and service features such as parking, mechanical, plumbing, electrical, and HVAC systems. After examining nearly 1,000 buildings across cities in the U.S. and Canada, the team determined that approximately 25 percent meet the criteria that would support a feasible conversion. Paynter suggested that conversions in 5 percent of the office buildings examined could yield more than 6 million homes. He indicated that conversion projects could increase cities’ tax revenue and activate downtowns.

Conversions of buildings that are 50 or more years old can be fiscally challenging. Aftuck explained that budgets for converting older buildings must account for upgrades to the structure and the heating, cooling, and ventilation systems. Buildings on the National Historic Register can finance upgrades using federal and state historic tax credits. Tax increment finance (TIF) district funding and tax abatements can also help offset renovation costs. Another strategy to reduce variable costs, said Aftuck, is to use the same design concept and appliances across multiple conversion projects. In addition, employing the same subcontractors and architects can ensure continuity of expertise from project to project. These steps can alleviate some of the unknowns often associated with conversion projects.

Developers of office-to-residential conversion projects often consider strategies to speed up construction and innovative solutions to repurpose building footprints. Smith explained the design processes and challenges that emerged during the conversion of The Foundry — a 520-unit apartment building located in Alexandria, Virginia. The 600,000-square-foot former office building required a complete replacement of the façade. The Cooper Carry team used brick face precast, which is more expensive than traditional masonry but can be installed much faster. This decision saved the project nearly 3 months of construction time. For conversion projects, “time is money, and quickness to market needs to be factored in your performance,” said Smith. The Foundry’s footprint encompasses nearly 47,000 square feet, approximately 1.6 times the size of the footprint of a typical office building. Smith and his team at Cooper Carry devised solutions to fill the extra space with storage units measuring 24 square feet and renting for approximately $100 per month. In addition to storage, the renovated building uses the vast footprint for amenities such as ground-floor retail and a multistory gym.

City Initiatives

Several cities have developed programs that offer public financing, tax incentives, and regulatory reforms to spur conversions. In September 2022, Chicago launched the LaSalle Reimagined Initiative, which seeks to convert some of the 5 million square feet of vacant office space into residential units and retail. The focus area encompasses five blocks of high-rise office buildings along LaSalle Street, most of which previously housed financial firms. The corridor has no affordable housing and, since 2000, has experienced a 22 percent decline in leased office space, with population growth on the street at a standstill. The LaSalle Street corridor is also located within a TIF district, which will help fund between $33 million and $115 million for each of the five selected conversion projects. The selected projects must set aside at least 30 percent of the units as affordable housing. Once complete, the projects will add more than 1,600 housing units, of which more than 600 will be affordable. The city aims to make the LaSalle corridor a complete neighborhood that transforms the ground floors of the buildings into grocery stores, restaurants, museums, and other amenities, said Cox. In addition, equity is at the center of Chicago’s initiative, which strives to ensure that downtown workers can live near their jobs.

Similar to Chicago, office use has declined in Lower Manhattan as tenants have moved to more modern buildings with amenities. Campion explained that since 1995, approximately 20 million square feet of obsolete office space in Lower Manhattan has been converted into approximately 17,000 residential units. These successful conversion efforts stem largely from the 1994 Lower Manhattan Revitalization Plan, which proposed tax breaks and regulatory reforms to facilitate conversions that could help spur a mixed-use district. New York City and state officials created the 421-g tax incentive, which led to the conversion of approximately 13 million square feet of predominantly pre-1945 office space into approximately 13,000 residential units.

The 421-g tax incentive gave developers a 14-year break on property taxes. In addition, the city enabled office-to-residential conversions to proceed “as-of-right,” thereby lifting regulatory barriers that had hindered these projects, such as minimum unit sizes and density restrictions. Although 421-g has expired, the tax incentive paved the way for future office-to-residential conversions and helped the city and developers to see what was possible. According to Campion, developers completed approximately 4,300 conversions in the city after the incentive expired, and approximately 3,700 more units are under development, predominately located in Lower Manhattan. The Lower Manhattan Revitalization Plan did not include affordability goals, but legislation is forthcoming that will require affordability requirements for future conversion projects.

In Washington, D.C., commercial property provides a significant source of tax revenue because it is taxed four times more than residential property, noted Sayin. Washington, D.C., began experiencing budget shortfalls with the decline in the demand for office space during the COVID-19 pandemic. As a result, local officials examined the feasibility of repurposing office space. Sayin discussed the regulatory barriers developers must consider when undertaking conversion projects in Washington, D.C., suggesting that land use restrictions and the local inclusionary zoning law can deter potential conversion projects. To spur downtown development, Mayor Muriel Bowser and the Office of the Deputy Mayor for Planning and Economic Development launched D.C.’s Comeback Plan in January 2023, which in addition to other goals, aims to increase the number of downtown residents by 15,000 and create housing across 7 million square feet through conversions and new construction. As part of the plan, the city is allocating approximately $2.5 million toward tax incentives for conversion projects, but much more funding will be needed to incentivize conversions, said Sayin.

Facilitating Placemaking

Office-to-residential conversion efforts across the U.S. can help cities revitalize downtown cores as destinations for residents and visitors to experience cultural activities and amenities. The strategies in Chicago and New York emphasize placemaking, said Campion, through increased access to amenities to boost people's quality of life. Paynter indicated that local officials should reframe the concept of the central business district to the "central neighborhood district." The transformation of office buildings into residential uses must also include neighborhood amenities that appeal to new residents and visitors. As more cities consider the feasibility of office-to-residential conversions, local policymakers can consider reforms to zoning laws and land use regulations and offer tax incentives to reduce barriers and facilitate successful projects. These steps can spur new business development and increase foot traffic in downtown cores. Converting office buildings into residential units allows cities to address housing shortages and empty office space — two co-occurring challenges.