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Encouraging Office Conversions

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Encouraging Office Conversions

Repurposing office space can ensure that city centers remain vibrant in the remote-work age. Summer 2022
Economy, finance, and budgets
Cities

The rise of remote employment may benefit workers who suddenly have access to a wider national labor market, but it has left many office-heavy corridors of city downtowns half-empty. Some U.S. cities rich in specialized white-collar workers, such as New York, San Francisco, and Washington, D.C., risk being left with permanently suppressed demand for office space and high apartment rents that push newly virtual workers out to the suburbs.

Revamping commercial corridors for mixed or residential use presents a compelling option for cities with still-sluggish office markets: here is a chance to put vacant office space on valuable land to better use while easing urban housing shortages. If as many as 40 percent of office workers in cities like New York ultimately work from home in a post-pandemic world, these office-to-residential conversions will be unavoidable. But office conversions will not happen on their own unless cities make a serious effort to bring down their cost.

Conversions tend to be inconvenient and expensive, particularly for postwar structures with large floor plates. Modern office buildings are typically wide and filled with windowless offices, storage rooms, and elevator shafts. Since apartments require natural light, converting buildings with deep footprints will yield dark, long units. Some buildings are so deep that the only feasible conversions involve cutting an interior courtyard. And tearing out or redirecting existing HVAC, plumbing, and electricity to individual apartment units is costly and time-consuming.

Easing office-to-housing conversions will thus require much more than simply zoning neighborhoods for new uses. Cities should also relax rules to allow by-right conversions without lengthy reviews. Further, they should exclude these renovation projects from any parking requirements, setback rules that differ between commercial and residential developments, and limits on height or floor-to-area ratios. A streamlined process to shepherd conversions quickly through relevant permitting processes and limiting discretionary review will also save potential developers time and money.

In commercial zones dominated by office space, planners should consider exempting conversions from inclusionary-zoning requirements. High affordability quotas—requiring a share of new units to be rented or sold at prices likely unprofitable for developers—may deter conversions. Given larger office floor plates, developers will need to build larger units, making affordability requirements even more cumbersome. In an all-residential or mixed-use neighborhood, inclusionary zoning can be the price that developers pay for building a new apartment complex; but in commercial zones with few or no existing residents, political backlash and displacement are less relevant concerns. And though conversion developments will probably need to consist of large units with above-average rent or sale prices to be financially viable, additional supply will still ease the rent crises gripping major cities this year.

Finally, leftover federal money from last year’s American Rescue Plan could be redirected to tax breaks for office-to-residential conversion projects. Cities should be careful not to overemphasize conversion or attempt to engineer the conversions of entire neighborhoods, keeping open the possibility that more workers might return to the office down the road. But given how high work-from-home rates remain more than two years after the beginning of the pandemic and how few conversions are happening in city centers, it’s hard to imagine a well-tailored subsidy yielding too many conversions.

Farther from central business districts, the case for subsidies is weaker. Lower rents and land values make more conversions viable without public funding. In some suburban markets, workers and firms are returning to in-person work much faster than in city centers—a process with which subsidies might interfere. Public subsidies also should not chase conversions of Class A offices, instead focusing on older Class B or C buildings that are easier to convert and less coveted by tenants.

Not all office buildings—even those sitting largely vacant right now—are cut out to be converted to residential uses. Some may simply need to be demolished, while others will ultimately fill up again. But even converting just 10 percent of midtown Manhattan’s older office space to residential use could yield 14,000 units in a city starved for new housing. It may not be local government’s role to assume the losses that building owners are facing in a post-pandemic economy. But cities do have an interest in preventing prime neighborhoods from emptying and decaying, ensuring an adequate supply of housing, and adapting nimbly to economic change.

Mayors and council members will need more than slogans and public pressure to bring life back to eerily quiet downtowns. They must meet this challenge with flexibility and a focus on dismantling the barriers to productive, adaptive reuse across their cities.

Photo: Sergey Nazarov/iStock

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