How to Make Office-to-Housing Conversions Work

Earlier this year—and for the first time since the pandemic began—Kastle Systems reported that office occupancy in 10 major U.S. cities reached 50%. The statistic underscores the changing landscape of how we work, and for cities it raises a critical question about how to revitalize downtowns.

One answer that has been getting a lot of attention is converting offices into residences. It is a solution that solves two problems for local governments. 

Converting offices “to housing will help us bring back our commercial business districts while also addressing our housing supply crisis,” said Deputy Mayor for Economic and Workforce Development Maria Torres-Springer at a special briefing Thursday hosted by the Volcker Alliance and Penn Institute for Urban Research.

The panel, which discussed what it would take to “revitalize downtowns by turning offices into homes,” comes as the issue is top of mind for mayors in both big cities such as New York, San Francisco and Washington, D.C., and smaller cities like Lincoln, Nebraska; Burlington, Vermont; and Waterloo, Iowa. 

The issue has even headlined mayoral races. In Denver earlier this year, candidates pitched their vision for a downtown comeback, with several supporting the conversion of office buildings into housing.

At the event, panelists coalesced around five things cities need to do to successfully launch an effort to convert office buildings to residences.

Start Now

The first thing panelists urged cities to do is get to work. With more people opting to work from home, downtown economies are collapsing. On any given week, the office occupancy in major cities hovers around 45% of pre-pandemic levels. 

This has put pressure on mayors to move “quickly to put a floor under the deterioration  … whether it’s the tax base deterioration as some of these buildings go unused or their values drop or certainly the perception and data around rising crime in some cities,” said panelist Heather Long, a columnist and editorial board member for The Washington Post. “You don’t want people to think about these areas as no-go areas. You want them to start seeing that there is transformation and there is revival going on.”

Amy Cotter, director of climate strategies at the Lincoln Institute of Land Policy, underscored that sentiment.

“It is not too soon for any central business district to start thinking about how it responds to a decline in their office market,” she said. “Less life on the street will only further discourage tenants from renting space in those buildings and discourage redevelopers from seeing an opportunity in the redevelopment of a building. Cities should take immediate action.”

One of the reasons to start now is that office-to-residence conversions are a long-term project. 

“The whole conversion process is a two-decade process,” said Stijn Van Nieuwerburgh, a

professor at Columbia University’s Graduate School of Business. “I think of this transition as the sort of transition … where New York City went from a port and a manufacturing town to a modern service sector economy over the course of 30 years. We are facing a similar Industrial Revolution, if you like, here.”

Be Flexible With Regulations

For cities that want to diversify their office stock, there is an essential and obvious next step: Make sure it is allowed under a city’s regulations. 

“If you don’t already allow mixed-use in your central business district, the time has come to look into doing that,” Cotter said, adding that before embarking on a years-long, full rezoning process, cities should consider if an overlay district or special district could form to allow for these conversions.

In general, Cotter urged cities to be creative and flexible. For instance, she suggested revising floor-area ratio limits so they aren’t as restrictive or eliminating parking minimums so that developers have flexibility to use that space in conversions.

To speed things up, panelists also proposed removing regulatory hurdles, such as waiving environmental reviews when the use is as benign as the previous use or relaxing transportation regulations on curb cuts so that entrances can be moved.

Form a Solid City-State Partnership

If any of this is going to work, cities and states need to be partners.

“I don’t know if it is fully appreciated just to the degree to which cities are a creature of state government,” said Cotter. “States set the sources and the rules by which cities can raise revenue, by which they can use redevelopment tools, such as zoning flexibility, so that fiscal relationship and partnership is an essential aspect of the redevelopment of downtowns. States should recognize that their fortunes are tied up in these cities as well.”

Panelists praised the partnership formed in New York as a model.

In December, Mayor Eric Adams and Gov. Kathy Hochul announced a plan for converting vacant office buildings into homes by, among other things, making zoning laws more flexible. Adams followed up the announcement with a list of specific recommendations for converting underused offices into 20,000 homes for 40,000 New Yorkers over the next decade.

Deputy Mayor Torres-Springer called the partnership “historic” and essential as the city needs the legislature to make several changes to the law to facilitate conversions.

“We need to build together,” she said, “because so much of what needs to be modified, what needs to be lifted or relaxed requires state legislation.”

Provide Subsidies

Of the five panelists, most agreed that the biggest hurdle is financing.

Van Nieuwerburgh, the Columbia professor, said that while many have thought through the physical and regulatory obstacles to converting these spaces, not many have evaluated the fiscal viability of these conversions.

Citing high interest rates, high office vacancy rates and the banking crisis, Van Nieuwerburgh argued that without government subsidies, these projects do not make sense financially.

Long, the columnist, agreed. “People have shown me their spreadsheets,” she said, “and something that was very viable a year ago just looks very different now.”

But there is a precedent for governments in funding office-to-apartment conversions, according to Van Nieuwerburgh. The 421-g tax incentive program helped “stimulate conversions—about 12,000 apartments were built in the mid- to late 90s under that program,” he said. “We could do this again, sort of a modest tax abatement … to make the numbers work out.”

Another opportunity is to explore federal funding opportunities. Van Nieuwerburgh said that financing for these conversions may be a possibility under the Inflation Reduction Act.  The Environmental Protection Agency has a $22 billion pot of money that is potentially usable, he noted, but more guidance is needed.

Future Proofing and Plan Around Amenities 

Finally, panelists stressed the importance of taking this opportunity to think about amenities and future-proofing downtowns, such as making buildings more resilient in the face of, say, flooding. 

Cotter suggested adding solar panels to provide for power backups in case of power outages or adding energy efficiency measures to lower energy costs for occupants of the units.

Long emphasized planning around amenities, specifically parks.

“When you are converting all these areas that used to be offices, think about the other amenities. Usually what cities find is that things like grocery stores will come after you start to have the concentration of residents, but things like parks you have to think ahead of time.”