The COVID-19 pandemic caused profound changes to American life and work that had far-reaching economic consequences. More than 33% of households now have a home office more often than they did before, and employees work an average of 3.5 days at work, which is a reduction of 30% from the pre-pandemic average. This change has affected the market for commercial real estate, mainly office buildings, healthcare, and hospitality facilities. One of the most significant issues with the property market, in addition to the need for accessible housing, is whether converting office buildings into apartments is possible.
For the quarter that ended in February of 2023, real estate investment volumes fell by 64% compared to the previous year, while office vacancies climbed to a 30-year record of 18.2 percent. This oversupply of office spaces has reduced the number of people who walk into local firms. The administration has attempted to incentivize people back to their offices in cities like New York City. The Biden-Harris administration has recently announced an initiative to speed up converting commercial properties to residential units, which will address the problem. A fresh initiative announced this week by Biden-Harris’s administration will speed up the conversion of commercial properties into residential units and offer a chance to avoid an issue from happening again.
Policymakers in cities like Washington, DC, New York, and San Francisco are actively working to revitalize their downtown areas through commercial-to-residential conversions. These conversions comprise hotels, vacant offices, and non-office commercial space, providing a way to revive real estate and tackle persistent housing issues, like housing shortage and affordability issues.
By the end of 2020, the housing market faced a shortfall of 3.8 million units, resulting in the lowest vacancy rates for rental units in the last decade. Conversions are also a method to fight climate change because buildings contribute to 29% of U.S. greenhouse gas emissions. Conversions to rehabilitated structures produce between 50 and 75 percent lower CO2 pollution than new structures.
A brand new federal guidebook on funding explains how federal tools can be utilized to aid in creating affordable housing via conversions. In the past, cities have opted for conversion incentives in times of economic decline. For instance, New York revitalized Lower Manhattan after 9/11 through zoning reforms and tax incentives, increasing the number of residents living there by converting twenty million square feet to housing.
In the dot-com bubble era, Los Angeles eased zoning restrictions for older commercial buildings, which led to the construction of 12,000 dwelling units over the course of 20 years. In Philadelphia, the conversions tied to 10-year tax reliefs on property tax have resulted in the transformation of 8.2 million square feet of office space to housing, thereby increasing the population of the city’s central area by 54 percent.
Commercial-to-residential conversion projects face significant physical complexities. Office buildings, particularly the latest ones, are built with big floor plates to allow for open-concept workspaces, as residential units need elements like opening windows to the exterior bathroom facilities, in-unit bathrooms, as well as kitchens. This calls for changes in the floor-to-floor-height windows, the window system, heaters and cooling units, sewers, and elevator access. Previous conversion projects usually focused on prewar office structures constructed with smaller plates.
In addition, converting commercial real estate into housing presents problems for the financial side. Office vacancies are different across building features, and the vacancy statistics do not take into account several tenants and their lease conditions. Zoning restrictions, like density restrictions, parking regulations and strict guidelines for use, are added to the complexity.
But, research suggests that 15 percent of office buildings in commercial districts in the 105 biggest U.S. cities are suitable for conversion to residential, which could increase the number of units to 171,470. Developers claim that conversions can be completed faster and cost up to 20% less than tearing down and building.
COVID-19’s effect on the slowing demand for office spaces demand is likely to persist into the coming decade. The pandemic has triggered the “flight to quality” in office space, which resulted in 10 percent of U.S. office buildings accounting for 80% of the occupancy loss. The buildings with high vacancy rates tend to be older and located in the downtown submarkets. Facilities that meet the required criteria will provide the housing needed and cut emissions.
Several federal programs support commercial-to-residential conversions. In particular, the Biden-Harris Administration aims to facilitate these conversions even more through the Housing Supply and Action Plan. Programs like those offered by the Communities Development Block Grant and Department of Transportation policies will help finance the conversion. The Historic Tax Credit is also accessible, assisting more than 47,000 homes and generating greater than 150,000 low-and low-middle-income housing units. This complements actions like HUD’s recently announced $860,000 in grant funds to study office-to-residential conversions undertaken since the pandemic.
According to a Zonda study that surveyed buyers who are new to the nation about what they’re looking for the next time they look for a home, the top reason for buying a home was “location”, followed by “home design” and “price”. “Office buildings hold some of the best locations in the country,” states Mollie Carmichael, Director of Advisory and Product Strategy at Zonda. “It is logical that the conversion of office to home could work very well for today’s investors. The key will be to keep a sophistication that meets a home quality and ensure the design meets what today’s consumers are looking for.”
When the residential real estate market develops, the potential for housing conversions will continue to appear.
