Brian Anderson: Welcome back to the 10 Blocks podcast. This is Brian Anderson, the editor of City Journal. Joining me on the show today is Mene Ukueberuwa. He’s an editorial board member at the Wall Street Journal, a former associate editor of City Journal. He writes about politics, economics, education, and lots more. He’s been on the show before, and we’ve published a number of his pieces in City Journal. His work has also been featured in National Review, New Republic, New Criterion, and other prominent publications. Today, we’re going to discuss his recent writing for the Wall Street Journal on cities’ efforts to convert unused office space into apartments, residential apartments.
So Mene, always great to talk with you. Thanks for coming on.
Mene Ukueberuwa: It’s great to be back, Brian.
Brian Anderson: Yeah, this is a looming problem post-pandemic for cities, urban business districts, really, nationwide have yet to regain pre-pandemic activity. I saw one study that was looking at foot traffic and tracking cell phone use, and I think the best cities were doing were two-thirds returned to pre pre-pandemic highs. New York and Chicago’s office buildings are estimated to be around 20 percent empty. And San Francisco’s in a bigger crisis. Their vacancy rate, I think, is over 30 percent, and that was noticeable when I was out in San Francisco recently.
So, as you detailed in a recent Wall Street Journal editorial, many cities are looking to adjust to this new reality to transform all of this empty office space into residential apartments. Some mayors are offering incentive tax breaks to encourage these conversions. So, what is the state of play there? Which cities are pushing this via tax breaks, and are there different approaches to try to carry out these conversions?
Mene Ukueberuwa: Yeah, I think it’s been interesting to follow the action over the past few months because people have been talking about the prospect of converting unused office space into apartments in a very big way since the beginning of the pandemic. We saw, of course, the rise of work from home. And people predicted that now that we had demonstrated the concept, even after the pandemic eased up, you’re going to see a lot of office workers continue to work from home, and that has continued to be the case. And so we’re no longer in a place where people can expect that we’re going to return to pre-pandemic levels of office occupancy. And that means there are a lot more empty spaces in these offices. And this isn’t only a problem for developers, of course, because office workers are important for cities because of the foot traffic that they generate, as you mentioned. There are downstream effects for restaurants, stores of all kinds, and all sorts of urban amenities take a hit when there aren’t as many people in the office.
And so for many months, people were wondering whether developers would begin the process of saying, “Let’s take this unused office space and convert it into apartments because there is still very high residential demand in some of these cities.” And so, it converts an unneeded office asset into a highly needed residential asset. But now, what we’ve seen just in the past few months is that a lot of cities are rolling out policies to aid this process, not just waiting for developers to take the lead. They’re saying, “We need to change the policies and make it a more favorable ground for these conversions to happen.”
And so you asked what cities are deploying in this vein, and I think it’s very interesting that just in the past two months, you have two very different approaches being taken by a pair of major cities. One is Boston, which in July, rolled out a policy to give developers up to a 75 percent tax break if developers choose to convert offices into apartments. And that tax break can last for about 29 years. So that covers not only the period of converting the office, which often takes a few years, but many years after that. And so the idea is to encourage as many of these companies to make these conversions as possible by vastly reducing the cost of doing so and making it very likely that they’ll get a good return on their apartment buildings.
In New York, in August, you had Mayor Eric Adams roll out a plan that is going to rezone parts of the city to allow more people to convert office buildings into apartments. Particularly, they’re targeting Midtown where you have a lot of older office space and where these conversions generally haven’t taken place. And this policy is not incorporating a tax break. Basically, the idea is that they’re going to give relief in the zoning code in ways that encourage developers to make the change by reducing the amount of compliance that they have to jump through and making it available for buildings in every neighborhood in New York as opposed to just Lower Manhattan, where it was already permitted.
And so you can call it a tale of two cities between Boston and New York. One has a financial incentive, one is merely relying on zoning changes, and that will be a great experiment to see which approach is more effective and whether there’s a major difference in the results in the number of offices being converted in the coming years.
Brian Anderson: It’s very interesting. Now, many of the cities with office occupancy rates that are low right now also have, and this might seem paradoxical, some of the highest apartment rents. New York, I think, is just off the charts now. San Francisco is still pretty bad. Are office-to-residential conversions, as you’re describing, an effective way to increase the supply of affordable housing? And why is there such demand for housing in some of these cities which are struggling in other respects?
Mene Ukueberuwa: Well, that’s a great question. I think one of the first things to point out is that office-to-residential conversions can only be part of a plan to increase the supply of affordable housing. There’s certainly not a silver bullet even in some of these cities that have very high office vacancy rates. For example, mayor Eric Adams’s plan in New York is to create, at most, about 20,000 new apartments in Manhattan over the course of the coming decade through office conversions. Whereas Manhattan is a city that has at least 850,000 apartments. And so, you’re really only going to increase the supply, at most, by a small percentage of the total residential population of the city. It’s not something that’s going to create a massive decrease in rents or a massive increase in availabilities for apartment buildings. But of course, in these cities that are very dense and where there is very high apartment demand, any little bit helps. And so that’s the best way for mayors to look at this as part of a mix of policies.
But I do think that to your broader question of why you see the correspondence of low office occupancy and high residential demand, it’s really because work is something that people have discovered that they can do just as well from anywhere. And if they’re people who were already living in the suburbs during the pandemic or they were people who were living in the cities and decided to maybe move a little bit further out, they don’t want to take the time out of their day or bear the additional cost of commuting anymore and are just as productive working at home. And so they feel as if the office is something that they can easily part with.
But a lot of people, and particularly younger people, find that they really can’t do without the amenities that cities offer. They want to be able to walk around and not have to drive everywhere. They want to be able to go to bars and restaurants and have an endless variety of opportunities, especially in the off-work hours. And so residential demand did dip briefly during the pandemic, but it really surged back and is now above pre-pandemic levels in a lot of these pricey coastal cities like New York, Boston, Washington, San Francisco. And so that’s why you have that mismatch between under-demanded offices, but over-demanded apartments, and that’s what makes office conversions a particularly attractive policy solution.
Brian Anderson: Now, the office-to-residential conversions, you can’t just snap your fingers and make this happen, unfortunately. They’re expensive. They’re often complicated, just doing it. So they require plumbing and electrical lines to be rerouted. Elevators often need to be replaced or changed in terms of their location. Air conditioning systems need to be rebuilt. And because most jurisdictions require rooms in residential apartments to have windows, office buildings, which generally have deep floor space, aren’t always easy to reconfigure for residential use in the sense. And in some cases, it may be just an impossible obstacle. So, to what degree are these kinds of conversions really practical?
Mene Ukueberuwa: Right. Well, I think you hit on a lot of the major barriers that have prevented developers from going ahead and converting office spaces into apartments at scale in the past. Office buildings are very different from residential buildings in the layout of the floor plan, in the amenities that they offer. Of course, in an apartment building, you have to run individual piping gas, et cetera, to much more spread-out area of units that have to have hookups for every single room as opposed to the centralized setup that you’d see in large office buildings.
And I think that, really, a lot of the difficulties correlate with the age of the building. So you find that in older buildings, particularly in dense cities like New York, Boston, again, you find that there are a lot of buildings that are easily convertible to apartments because they have smaller floor plates, as you mentioned, the total area of the building is much smaller, which means that there’s much more of it, which is closer to the exterior of the building, which means that it’s easier to have apartment units that you’re adding have windows. And also, generally, they have a frame in the way that they’re constructed that allows for the spacing of apartment units much more naturally than you would see in some of these very large glass corporate towers that dominate buildings that have been built since the 1980s.
And so, when these mayors are rolling out policies to encourage conversions of offices into apartments, generally they’re looking at neighborhoods that have a lot of these older and smaller buildings, because that’s where it’s going to be much easier to do. But the built-in costs of doing these conversions are one of the reasons why mayors believe that the conversions will only be successful if they offer tax incentives to make it more worth developers’ while. And so in the cities that are merely rezoning, you’re going to see developers take a look at a lot of buildings and decide that they would be not feasible to convert over into apartments, but when they do have the availability of tax incentives, then that’s going to put more potential buildings in play for this kind of treatment.
Brian Anderson: We can look back at New York City, which is one of these two cities that are trying to do this, now that you mentioned, and there was some success in these conversions in the past. During the 1990s and 2000s, 13 million square feet of empty commercial space in New York City was transformed into residential use. Policymakers pushed through a plan to encourage property owners in Lower Manhattan, which was, at the time, the epicenter of the vacancy crisis, to convert office space into apartments. And more than 12,000 apartment units were created as a result of this initiative. And now Lower Manhattan is one of the liveliest and most sought-after residential areas in all of New York City. So, I wonder if there are lessons we can learn from this earlier conversion story to apply to today.
Mene Ukueberuwa: Yeah, absolutely. I think that that tax program in the late ‘90s into the early 2000s is the great proof of concept that both developers and mayors look to know that this is something that can actually be successful to create not just a drop in the bucket, but completely change the face of a neighborhood. Lower Manhattan had seen the flight of a lot of the financial firms that used to populate it, leaving a lot of vacant office space. By the 1990s, you had a huge share of vacancies down there. And that once-bustling part of the city had become very dreary, and you had a lot of the owners taking a massive hit on these assets. New York stepped in to rezone the neighborhood to allow the conversions, and also allow a tax abatement on conversions into apartments. And that really did encourage quite a lot of redevelopment. So this was part of Rudy Giuliani’s broader redevelopment plan for Manhattan, which was very successful in some ways.
I do think that it’s important to not overdraw too many lessons from that change because, in addition to the tax abatement that developers had access to, you generally had residential demand for apartments surging during that period. You had seen crime be cleaned up by quite a lot since the early ‘90s with the deployment of more police and the beefing up of NYPD. You had a surging growth in the markets and New York’s financial sector was booming again after some stagnant periods in the 1970s and ‘80s. And so you had a lot of people wanting to move into Manhattan, and you had particularly a lot of wealthy people who were willing and able to pay high prices for new luxury apartments. And so the conversions were very successful because demand was high.
But if you see that mayors who are seeking to replicate that success are creating huge tax breaks today, like Michelle Wu, the mayor of Boston, right now, as we have mentioned, you do see very high residential demand. And so it seems quite likely that developers might still be able to get a good return on some of these conversions and that the city would do well offering these tax breaks. But you never know that that demand is going to stay as high for as long as it did in New York in the late ‘90s and early 2000s. And so, if a recession were to come within the next five years, and all of a sudden you don’t have as many people willing to pay a top dollar for these apartments, then Boston ends up taking a massive hit in terms of the tax revenue that’s being generated because of the carve-outs being given to developers for these conversions. So it’s a risky strategy that isn’t necessarily going to replicate itself.
Brian Anderson: You’ve mentioned a few times the zoning question. It is indeed a well-known culprit in thwarting new construction of any kind in cities. It certainly also limits remodeling or redesigning buildings. So many local zoning codes include very specific recommendations for residential buildings such as stairwell width, elevator placement. All of this is going to, as you suggested, add a lot of complexity to renovations.
I wonder what role zoning reform is going to play in facilitating conversions, and maybe just say a bit more about some of the zoning obstacles.
Mene Ukueberuwa: Absolutely. Well, there are two types of urban codes that can inhibit conversions. One is building code. So requirements for residential buildings, they’re often very stringent in certain cities. The stairwells have to be a certain width. The windows have to be operable. There are all kinds of provisions that are attached to the construction of a new apartment that developers have to adhere to to fall within the law.
And so conversions, because you’re starting with a building that already exists and was built for a different purpose, often those types of restrictions on the building interior and the specifications of its amenities can be restrictive. And so it’s very helpful to give them some flexibility. Maybe office buildings tend to have broader stairwells, but the residential buildings are required to have more narrow ones. If a city steps in and says, “We’re going to give you an exception. You can keep the stairwell the same width that it is,” that’s something that sounds very simple, but can actually reduce the cost of converting the office building by quite a lot. And so you’ve seen cities like San Francisco start to reform some of the very strict specifications on what residential buildings are required to have in a way that’s going to facilitate more conversions.
The other type of zoning is what type of building can be built in what neighborhood. And so this is something that New York is addressing. You have certain areas of Midtown and other neighborhoods where apartments are simply not permitted to be built. And Eric Adams and his reform plan is trying to allow apartments to be built in a broader array of locations so that if you have some of this older office space, you have the right as a developer to go ahead and convert it into an apartment building.
So zoning is something that has been talked about a lot, quite a bit with the creation of new apartment buildings, but it also is something that is going to have a big role to play in the conversion of existing offices into apartments.
Brian Anderson: It’s an enormous challenge for the post-pandemic city, so this is a really important topic. I want to thank you very much, Mene, as usual, for coming on and illuminating us.
Our guest has been Mene Ukueberuwa from the Wall Street Journal. He has written a number of times for City Journal as well. So you can check out his work on the City Journal website. That’s at www.city-journal.org. We’ll link to his author page there in the description. You can also find City Journal on Twitter, @cityjournal, and on Instagram, @cityjournal_mi. And if you like what you’ve heard on today’s podcast, please give us a five-star rating on iTunes.
Mene, great to talk with you as always, and look forward to seeing you soon.
Mene Ukueberuwa: Thanks a lot, Brian. I appreciate it.