Too many cubicles and too few apartments create incentives to convert offices into apartments

Read more Stateline cover how communities across the country are trying to create more affordable housing.

HERNDON, Va. – Watching his dog play in Chandon Park here in suburban Virginia on a Saturday morning, Juan Ramirez tries to imagine the huge office buildings next to the park becoming apartments and townhouses.

“I think it’s inevitable. People don’t use offices as much now. I hope it’s affordable. Maybe it will bring more young people to the city and higher taxes for parks,” said Ramirez, 38, who grew up in the area and recently returned to take a job as a restaurant manager after living in Minnesota and Ohio.

Cities and suburbs across the country are struggling with vacant office space as remote work becomes a mainstream reality post-pandemic. States are stepping in with tax breaks and zoning changes to replace the unwanted cages with much-needed housing. In suburbs like Herndon, the answer might be tearing down an office convoluted and replacing it with a residential building. In more urban settings, it could mean renovating and converting office buildings to create housing.

“The office vacancy rate has risen to its highest level in 30 years and at the same time there is a housing shortage. So the natural question is, “Why can’t we convert all these vacant office buildings into housing?” said Jessica Morin, director of research at CBRE, a commercial real estate firm. CBRE research shows conversion of offices to other uses, primarily residential, will peak at more than 20 million square feet this year, up from 6.3 million in 2021.

Some places that began conversions before the pandemic are leading the way: New York State and the City of New York changed their laws during the 1990s downturn to allow more office-to-housing conversions in Manhattan, although there is now a dispute between states and cities over zoning rules for up-to-date office conversions.

Ohio, where interest in city life increased as Cleveland spruced up its downtown for the 2016 Republican National Convention, now has three cities — Cleveland, Cincinnati and Columbus — in the top 15 list for office-to-home conversions, according to CBRE.

Nationwide, 119 office conversion projects, including residential and non-residential, are under construction or have been completed this year, the most since CBRE began tracking in 2016. These projects could create approximately 44,000 up-to-date residential units when completed.

Since 2016, projects with 125 million square feet of office space have been or are expected to be converted to other uses, usually residential, but sometimes warehouses or laboratories. However, despite the recent enhance, this represents only about 2% of all US office space.

Barriers to converting office buildings into housing include the continued high value of office buildings in some downtown areas of cities such as San Francisco, as well as the cost of demolishing or refitting senior office buildings with plumbing for individual kitchens and bathrooms. Many office buildings also lack windows with natural lightweight, which is often desired by apartment dwellers.

For this reason, government incentives as well as optimized zoning have played a immense role in making project costs more predictable for developers. Some states are further along than others. A up-to-date California law allows “legal construction” of residential buildings in office and other commercial areas, meaning developers don’t have to apply for a zoning change. Washington passed a law last year requiring cities to relax zoning regulations for apartments in existing commercial buildings. And a Arizona bill The law signed this month will allow larger cities to convert more commercial buildings into residential without making zoning changes.

Predictable zoning rules are critical for developers who don’t want to get bogged down in negotiations and rejections that could derail a project.

“Developers are just asking their states and localities to be really transparent, to streamline the process and limit the unknowns, because it’s the unknowns that create risk,” said Julie Whelan, vice president at CBRE. “Otherwise they’ll look at the next pasture.”

Incentive programs

In addition to the cities in Ohio are Chicago; Dallas/Fort Worth; Houston; Hartford and Fairfield Counties in Connecticut; the Kansas City metropolitan area; Louisville, Ky.; Minneapolis/St. Paul; Pittsburgh; Milwaukee; New Jersey; and Washington, DC are on CBRE’s top 15 list for rate of office space converted to apartments.

Ohio has two incentive programs for converting offices into homes. A 2020 program for “transformational” Projects that could spur further development helped convert four floors of offices at Cleveland’s Playhouse Square into apartments under construction. An incentive to preserve historic buildings in force since 2007 helped partially convert Cincinnati’s Carew Tower into apartments, said Mason Waldvogel, a spokesman for the Ohio Department of Development.

Missouri hopes to repeat that success in St. Louis, where about a quarter of the commercial space, including offices, is vacant. That includes downtown’s massive 44-story, nearly 1.5 million-square-foot One AT&T Building, which sold this month for $3.6 million, up from $205 million in 2006.

Missouri state Sen. Steven Roberts, a Democrat who represents downtown St. Louis, said a bill he sponsored has bipartisan Republican support in the suburbs and is aimed at upgrading downtowns in St. Louis and elsewhere to create places where people can live, shop, eat and work. The bill was voted out of committee in February and awaits consideration by the full Senate.

The bill would provide a state tax credit for up to 30% of the cost of converting office space to residential, retail or other uses.

“It is a creative solution to make the city center more lively and successful. We want more restaurants, more shops, more nightlife – and we do that by attracting more people to live there,” Roberts said. “It’s a problem for the city center and also for the whole country.”

Other states have passed laws to encourage greater conversion of offices into homes, according to one Minneapolis Federal Reserve Bank Report last year. Laws were passed Florida And Montana in 2023 up-to-date and converted apartment buildings in commercial areas and laws in Rhode Island And Wisconsin support the conversion of existing commercial and office buildings.

A Colorado bill currently in committee would provide tax credits for converting commercial space to housing starting in 2026, supporting Denver’s plans to transform its office-oriented Central Business District into a “Central Neighborhood District.” Denver identified 16 commercial buildings as prime candidates for housing.

Zoning changes

As of the mid-1990s, a combination of state and city laws helped with the transformation the Lower Manhattan business district with more housing, a process that accelerated after 9/11. A proposal from Democratic Gov. Kathy Hochul to expand the program to newer buildings failed due to the passage of the legislature as part of a wider measure This also included requirements for suburban and upstate communities to build more housing. Negotiations continue with lawmakers over the change for New York City this year.

New York City has also begun working on its own rules to allow office-to-housing conversions citywide for buildings built before 1990, said Casey Berkovitz, spokesman for the Department of City Planning. The state could do it faster and could also create tax incentives that the city cannot create on its own, and that is also part of current negotiations with the state parliament, Berkovitz said.

“With an office vacancy rate of 20% and a rental apartment vacancy rate of 1.4%, it makes a lot of sense to replace one with the other,” Berkovitz said. “We don’t want our own regulations to get in the way of that if it makes financial sense.”

In Herndon, city officials approved a zoning change last month that would clear the way for the demolition of offices on Worldgate Drive and construction of a combination of rental apartments, townhouses and “two-over-two” units with additional living areas that an owner can rent out or share with family members. Without subsidized affordable units, all housing would be market rate, Ken Wire, an attorney for developer Boston Properties, said at last month’s hearing on the zoning change.

“We believe that by providing more housing in the region we will increase overall supply and thereby reduce pricing pressure in the market,” Wire said.

Virginia considered two Senate bills this session that would have incentivized the conversion of offices into housing, but neither passed, said Allison Brown, policy fellow for the nonprofit Virginia Housing Alliance. One would have been created state income tax credit for converting office spaces into living spaces and another would have allowed more housing to be built in commercial areas if affordable housing had been included.

The Worldgate Drive housing plan could prompt Herndon to change its zoning rules to allow similar projects without zoning changes, said Elizabeth Gilleran, the city’s community development director.

Herndon wants to “preserve its sense of community and historic small-town feel” but also maintain a mighty business tax base that has helped shore up the city’s tax coffers when property values ​​inevitably rise and fall, Gilleran said. The city recently approved the conversion of a compact office park and hotel into residential housing. However, offices and other commercial buildings will remain an critical part of the city’s suburban building mix as density increases with a up-to-date commuter rail station opening in 2022.

“The city doesn’t want to become a bedroom community,” Gilleran said.