Following the COVID pandemic, the U.S. workforce has experienced a major shift towards remote work as companies realize the monetary and personal benefits.
Among this shift has emerged an unsurprising result: vacant office buildings.
Thousands of floors that once hosted bustling working environments now sit underutilized, meanwhile the U.S. experiences one of the worst housing shortages in history. Could these vacant buildings become part of the solution?
The Biden-Harris Administration thinks so.
Biden-Harris Launches New Plan for Housing
The Biden-Harris Administration is launching a new initiative that branches from the White House Housing Supply Action Plan.
This new initiative focuses on working with developers to transform these vacant office buildings into rentable living spaces in hopes of easing housing shortages in major cities.
Since these office buildings are typically in high-traffic areas with public transportation in close proximity, these buildings are prime locations to not only lower housing costs but also ease transportation costs.
Positive Results to Come
Remote work has left investors and developers sweating as their once-profitable office buildings have dropped in value. New York reports the value of retail and office buildings has dropped by up to 42.5%, which is also a big blow to city tax revenue.
Businesses that once existed to serve those who worked in these office buildings have struggled to stay afloat, creating ghost towns of streets that once never knew the sound of silence.
San Francisco, Boston, and Philadelphia have been hit especially hard.
Converting these spaces into much-needed housing to revive these ecosystems seems like a no-brainer, but seasoned developers recognize that cities will need to start offering financial rewards as well as a pass through a challenging regulatory process.
That tide is starting to turn.
San Francisco taking the lead in office conversions
San Francisco, which is facing a 33.9% office vacancy throughout the city, recently passed an ordinance in June of 2023 to relax zoning, reduce red tape, and cut fees to encourage building owners to convert their buildings.
One historic building is already headed towards a transformation. 988 Market St, the historic Warfield Building, is currently going through the approval process to begin conversion in early 2024.
Building owners, Group I, are taking advantage of these recent legislation changes in addition to the Mills Act tax abatement to cut costs where possible, and bring life back into the neighborhood. The Mills Act reduces taxes for building owners that volunteer to repair and maintain the historic character of older buildings, such as the Warfield Building.
This conversion is predicted to take only nine months and cost about $9 million to create 34 new apartments.
Eight other building owners have contacted the city with interest to learn more about initiatives to convert their buildings. If all eight of these building owners decide to move forward, this could create approximately 1,100 much-needed apartments.
A study by Moody’s Analytics has identified ten more buildings in San Francisco that they have deemed to be prime office buildings for a transformation. Their criteria include:
- Small enough floor plates to allow for natural light
- Close to transportation
- High vacancy or current leases close to expiration
To sweeten the pot even more, San Francisco Mayor, London Breed has mentioned a plan to add a ballot measure in March 2024 that would waive the city’s transfer tax on converted buildings.
On a larger scale, State senator, Scott Wiener, plans to introduce downtown revitalization legislation in January 2024 that would include tax breaks for office conversions.
The Biden-Harris Plan of Action
Although the process seems straightforward, an initiative like this is going to require collaboration and action from multiple parties.
The Biden-Harris Administration has proposed the following plan:
A Collaborative Effort on All Fronts
The National Association of Counties (NACo) is playing a pivotal role by supporting counties in converting commercial properties into homes, utilizing federal programs and technical assistance initiatives. NACo is actively engaging with counties pursuing such projects through informative sessions and plans to share valuable insights in a policy paper for interested county officials.
Calling in the Department of Transportation
The Department of Transportation (DOT) is being called in to assist in spurring investment through new federal funding and property repurposing initiatives. With over $35 billion in available lending capacity at below-market interest rates from the Transportation Infrastructure Finance and Innovation Act (TIFIA) and Railroad Rehabilitation & Improvement Financing (RRIF) programs, DOT's involvement encourages the financing of housing development near transportation, including conversions.
The goal is to encourage local and state governments to make changes to zoning and land use regulations to allow homes to be built in these vacant locations.
The Commercial to Residential Federal Resources Guidebook
The White House is working on the Commercial to Residential Federal Resources Guidebook. This guidebook contains information about over 20 federal programs that can assist states and municipalities in encouraging office-building conversions. These programs include low-interest loans, loan guarantees, grants, and tax incentives.
Along with this guidebook, there will also be training workshops to teach those interested in how to use these programs.
A big part of the challenge lies in that office buildings were designed to function as one thing: workspaces.
A large percentage of these buildings hold floors that are simply large open spaces. These are ideal for large spans of desks and conference rooms but for a living space? Not so much.
Several developers have tried their hand at designing what these spaces will look like and the result is often long narrow rooms, odd empty spaces, and windowless bedrooms.
Designing these homes with the space provided will require careful planning by experienced architects to ensure space optimization and safety and comfort for the future tenant.
It’s clear that the conversion of office spaces will not be feasible on all commercial buildings, but there is a profile that works well.
The New York Times outlines the profiles of buildings that work best for this type of construction. "They [buildings] might appear rectangular from the street, but viewed from above, they evoke letters — an H, O, C, U, I or L." These building shapes have the ideal floor plans to covert into apartments.
The other challenge lies in the cost. While it may seem like converting a space would be an affordable venture, other costs can stack up quickly.
One of those costs is buying out companies that are still utilizing their office spaces out of their lease. The other is high-interest rates.
Still, developers who are willing to get creative with how they develop their pipeline will find new opportunities that didn’t exist or pencil even a year ago.
Further, that’s exactly why the Biden-Harris Administration is pushing their initiatives to help offset some of those costs. They hope that these new programs will be an incentive for developers to make the move toward converting their buildings.
With how well this initiative has worked for the cities that have already leaped, we have high hopes to see a wave of new housing hitting the market very soon.
Working towards converting your underutilized commercial office space into livable apartments? From design to financing to construction, our team can help you every step of the way. Contact VBC today to help transform your space into profitable homes.