Getting Congress to Back Office Conversions

Lew Sichelman

A new report from the Bipartisan Policy Center suggests federal lawmakers should follow the lead of some state governments in enacting incentives to spur the conversion of underutilized or empty office buildings into multi-family properties.

The Washington think tank also maintains that the popular Low-Income Housing Tax Credit program should be expanded to ease some of the burden preventing conversions from being financially feasible. And it backs legislation that creates an office conversion tax credit for changing buildings that are at least 25 years old.

Repurposing offices is not likely to be nearly enough to meet the huge demand for housing, the Center’s Emma Waters wrote in a new brief. It is “my means no silver bullet to solve the housing shortgage,” she said.

But with nearly 1.6 million square feet of vacant space in hundreds of buildings nationwide, according to a JLL report, it is a “step in the right direction.”

The Bipartisan Center is a not-for-profit that works with both political parties to craft solutions that improves lives. Waters is a policy analyst on the group’s housing team.

In her report, she describes a number of ways some cities and states have started to address the challenges faced by developers in converting old office structures and incentives they are offering:

New York City: As far back as 1995, the Big Apple has had a tax abatement to encourage conversions in Lower Manhattan, where roughly 13 percent of the sector’s office space has been converted to residential. The result: 13,000 housing units.

More recently, Mayor Eric Adams has recommended creating a new tax incentive for conversions that include affordable housing or child care facilities.

Among other things, the colorful mayor’s proposal also calls for rezoning parts of downtown Manhattan that do not allow residential buildings as well as streamlining and updating regulations and expanding eligibility to simplify the conversion process. Currently, only structures in the Financial District or those built prior to 1962 are eligible for flexible regulations.

Chicago: The so-called Second City has selected five projects to be part of an adaptive re-use program along LaSalle Street. Together, they will offer 1,600 apartments, about 600 of which will be reserved for households earning 60 percent or less of the area median income. The city is offering tax-increment financing for the conversion as well.

Washington: In the Nation’s Capital, which has one of the highest percentage of remote workers in the country and, therefore, has a commercial vacancy rate of about 17 percent, the city has introduced a tax abatement plan to encourage conversions that calls for a 20-year tax break for developers.

As part of Mayor Miriam Bowser’s plan, D.C. also waives such regulations requiring a certain number of city residents be hired and landlords give residents a right to purchase a building for the first 10 years after it undergoes conversion.

California: Los Angles adopted its first adaptive reuse ordinance in 1999, allowing for a more steamlined review process and exemption from certain zoning requirements. And over the last 20 years, some 12,000 housing units have been added downtown.

Meanwhile, the state has allocated $400 million for use over the next two years to incentivize more conversion throughout its borders.

Wisconsin: The Badger State passed a bipartisan measure in June creating a fund to help developers cover the costs of converting vacant commercial buildings into affordable or senior housing. The plan offers interest-free loans up to $1 million.

Missouri: Like many states, the Show Me State uses a historic tax credit to advance conversions.

At the federal level, meanwhile, the Biden Administration has created a new interagency working group to find ways to support conversions. As part of the effort, the General Services Administration will identify underutilized office buildings that are well suited for conversion. In a recent report, the GAO said 17 out of 24 agencies are using an average of just 25 or less of their space. Uncle Sam owns more than 500 million square feet of such space.

In her recommendations, the Bipartisan Policy Center’s Waters said that because many conversions “do not pencil out without subsidies,” Congress should evaluate how to further incentivize them.

One way to do that, she wrote, would be to create an office conversion tax credit for older buildings that would be applicable not just to residential re-dos but also mixed-use buildings “which are essential for creating resilient neighborhoods.” Measures to do this were introduced in the previous Congress but not yet in the current session.

“Given the state of the housing shortage,” Waters says, lawmakers should hold a series of hearings “to further investigate the opportunities for bipartisan actions.”

Specifically, she says, they should find a role for federal policy to alleviate some of the many challenges associated with conversion projects.