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The Biden administration announced an initiative Friday to speed the conversion of underutilized commercial and office space into housing by providing new financing and technical assistance to developers, and by promoting the sale of surplus government property that has the potential to be redeveloped for housing.
The White House outlined more than 20 federal programs across six federal agencies that can be used to support office-to-housing conversions in a new 54-page Commercial to Residential Federal Resources Guidebook. The programs, including low-interest loans, loan guarantees, grants and tax incentives, can make conversion projects more attractive to developers.
Federal officials will hold training workshops this fall for local and state governments, real estate developers, owners, builders and lenders on how to use federal programs for commercial to residential conversions.
Adrianne Todman
“With a shortage of millions of homes nationwide, we need to utilize every resource at our disposal to increase housing supply,” Deputy Secretary of Housing Adrianne Todman said in a statement.
The Department of Housing and Urban Development (HUD) issued expanded guidance on how Community Development Block Grant (CDBG) funding can be used on a wide range of housing-related activities, including acquiring and rehabilitating properties for commercial-to-residential conversions. States and local governments can access up to five times their annual CDBG allocation in low-cost loan guarantees to fund projects such as the conversion of properties to housing or mixed-use development, HUD said.
Q2 2023 commercial vacancy rates, by market
Vacancy rates in commercial real estate markets in Q2 2023 (percent). The light blue line is the national commercial real estate vacancy rate in Q4 2019. Source: White House Council of Economic Advisers, CBRE, Census Bureau.
In a blog post Friday, the White House Council of Economic Advisers noted that office vacancies reached a 30-year high of 18.2 percent during the second quarter of 2023, reducing demand at local businesses including restaurants and retail businesses.
Researchers at Columbia University and New York University recently concluded that 15 percent of commercial district office buildings in the 105 largest U.S. cities are ripe for conversions that could yield 171,470 residential units or close to half of all multifamily housing constructed in 2022.
A 2022 analysis funded by the Commercial Real Estate Development Association concluded that conversions can be completed more quickly than new construction at costs up to 20 percent cheaper than demolish-and-rebuild projects.
Architectural, funding and zoning challenges
But as the Council of Economic Advisers also acknowledged, commercial-to-residential conversion projects must often overcome significant architectural complexities, funding obstacles and zoning constraints.
One problem is the architectural layout of modern office buildings, Slate’s Henry Grabar noted in a recent article analyzing why more office space hasn’t been converted to residential units to date.
Extensive work is required to bring plumbing and heating, ventilation and air conditioning (HVAC) into newly-created apartments, and the deep “floor plates” of office buildings mean it’s hard to provide natural light to interior rooms that have been converted into living space.
“The older stock of prewar offices, which are better suited for residential units, have often already been converted in cities like Chicago and Philadelphia,” Grabar concluded.
Rezoning and politics may be greater obstacles than the expense of remodeling, NPR’s Erin Kenney wrote in July, citing strict zoning rules in New York City and the expiration of a state tax exemption for builders who provide affordable housing.
Moody’s Analytics has estimated that after factoring in cost, profitability, tenancy and physical limitations, only about 3 percent of New York office properties may be ripe for conversion. Looser zoning restrictions could make more projects viable, but office-to-residential conversions are likely to “only put a small dent” in the additional 200,000 to 600,000 housing units New York is thought to need by 2030 “to achieve a well-functioning market,” Moody’s concluded.
In an April paper identifying purported “myths” about converting offices into housing, Brookings Institution researchers argued that office conversion “is a very pricey way to add just a fraction of the housing we need.”
“It is clear that some office-to-residential conversions make sense given the number of such projects that have already happened in cities of diverse market strengths and regional contexts nationwide,” Brookings Metro researchers wrote. “The critical questions now are: Would public sector intervention to catalyze more conversions be a good thing for downtowns that are struggling with commercial vacancies? If so, how much and what kind of intervention?”
Planners should analyze the potential unintended consequences of office conversions, and consider other ways to address housing shortages — including making it easier to build new housing on vacant and underutilized lots in downtowns and surrounding neighborhoods, Brookings researchers said.
HUD Secretary Marcia Fudge acknowledged Friday that commercial-to-residential conversions aren’t a panacea for addressing housing shortages.
Marcia Fudge
“Addressing the affordable housing crisis requires an all-of-the-above approach,” Fudge said. “The White House guidebook on commercial-to-residential conversions and the updated CDBG notice are just a few of the steps that HUD is taking to help our state and local partners boost supply.”
In May the White House announced a Housing Supply Action Plan that’s designed to reward jurisdictions that loosen zoning and land-use policies and provide new financing mechanisms for manufactured homes and accessory dwelling units, among other things.
As part of the new initiative announced Friday, the Department of Transportation issued guidance to developers and state and local governments on how to access $35 billion in subsidized loan funds earmarked for transit-oriented development projects, including conversion projects.
The Transportation Department will also make it easier for transit agencies to repurpose properties for transit-oriented development and affordable housing projects. New guidance allows transit agencies to “transfer properties to local governments, non-profit, and for-profit developers of affordable housing at no cost.”
The General Services Administration (GSA), which acquires and disposes of government property, will expand its Good Neighbor Program to promote the sale of surplus federal properties that could potentially be redeveloped for residential use.
Bob Broeksmit
Mortgage Bankers Association President and CEO Bob Broeksmit said in a statement that the group shares the Biden administration’s commitment to increasing housing supply “and appreciates its willingness to engage with us and the industry on ways to incentivize lenders and borrowers to rehab, repurpose, and convert more obsolete commercial properties into affordable rental housing and other usable spaces.”
“Housing providers are grappling with higher interest rates and rising labor and construction costs at a time when our nation’s housing supply remains inadequate,” Broeksmit said. “The initiatives announced today should help facilitate more commercial-to-residential projects. We encourage state and local governments to ensure zoning laws, tax credits, and subsidies are aligned to take full advantage of these programs.”
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