This story was first published by Stateline. Read the original article here.
Stroll through America’s vacant downtown areas, and a seemingly obvious solution to many states’ housing and homelessness problems emerges: Why not turn all those vacant offices into housing? Especially in cities like Portland, Oregon, where the core office vacancy rate peaked earlier this year at an estimated 27%?
The answer is as complicated as the unequal conditions that produced the office glut that began during the pandemic and accelerated in cities with high percentages of teleworkers who continued to work from home.
Office vacancy rates across the country neared a 30-year high of 17.1% last year, according to CBRE, a global commercial real estate services and investment firm. The decline in business and pedestrian traffic has been particularly dismal in Portland, San Francisco and Seattle, but New York and Washington, DC are also considering ways to convert more offices into apartments.
Modern high-rise buildings lack the plumbing, outward-facing windows, and internal footprint of buildings intended for residential construction, making some buildings expensive and difficult to remodel. However, some states are attempting to encourage conversions by waiving development effects fees, introducing tax incentives, and streamlining zoning changes to encourage office-to-residential conversions.
“We have to figure out how we can get units on the ground and how we can do that in a way that we’ve never tried before,” said State Rep. Pam Marsh, a Democratic lawmaker from southern Oregon who sponsored the necessary legislation major cities in the state to facilitate commercial-to-residential conversions without requiring zoning changes or conditional occupancy permits.
Marsh’s legislation would also require local governments to waive most system development fees, or impact fees, to reduce their costs. These fees go towards water, sewage and transport infrastructure.
The approach is one of the ways state legislators, governors and city leaders hope to address the nation’s 3.8 million housing unit shortages while revitalizing inner-city districts flattened by a decline in visitors and an increase in crime or the perception of crime.
In California, State Assemblyman Matt Haney, a San Francisco Democrat, introduced legislation to prevent local officials from delaying or denying commercial-residential projects. His proposal would allow such projects in all areas of a city, but they could not exceed certain height and density parameters. The cities would also have to speed up the approval process.
Haney’s proposal comes after Gov. Gavin Newsom, a Democrat, signed legislation last year making it easier to redevelop malls in California’s business districts designated for retail offices and parking lots.
“We must act quickly if we are to prevent our inner cities from crossing the tipping point into urban decay,” Haney said in a statement announcing his bill. “This law will stop bureaucracy and will allow us to act quickly to build much-needed housing and breathe life back into our inner cities.”
Washington, DC last year approved a 20-year tax break for eligible commercial projects converted to housing. New York City wants 20,000 new office-to-apartment conversions over the next decade, according to the Mayor’s Office. In Portland, the city recently waived system development fees for building conversions equivalent to seismic upgrades when they become residential, according to Oregon Public Broadcasting. In order to create incentives for conversions, the exemption expires in 2027.
But so far, conversions are “a marginal trend at best,” according to a 2022 Moody’s report. Office values and rents would need to fall much further “for the trend to become anything more than anecdotal,” according to the report.
According to CBRE, there was an average of 39 completed conversions each year nationwide, beginning in 2017 and ending in 2021. That’s just a drop in the bucket of the entire US office stock, according to the report. All planned conversion projects add up to only about 2% of the available office space. The conversions are concentrated in the coastal and northeastern states.
Nonetheless, conversion is progressing and has been for some time. This also applies to rededications that allow more housing to be built in commercial areas. New York City rededicated the Financial District in 1997 to make room for more residential buildings. Now she is also considering such a rezoning for Midtown Manhattan. Los Angeles made similar zoning changes in 1999, leading to a boom in downtown housing units.
these achievements were ahead of the current commercial real estate spate, suggesting there’s room for even more conversions, said Mary Kyle McCurdy, associate director of 1000 Friends of Oregon, an anti-sprawl advocacy group. The bill “makes sense for cities,” McCurdy said at a lawmakers’ hearing.
“These buildings are already on roads, possibly transit lines, that have infrastructure and are currently vacant or partially vacant,” she said. “Not only are the buildings not using existing infrastructure, but the fact that they are vacant means that the existing infrastructure is not being utilized.”
While embattled downtown areas are an obvious focus of Oregon’s legislation, the measure could also help convert vacant large suburban stores into apartments or convert hotels in commercial areas into apartments.
Adaptive reuse can be a climate-friendly strategy to increase housing supply in small-to-medium-sized cities, said Nicole Possert, executive director of Restore Oregon, a statewide historic preservation nonprofit. According to the CBRE assessment, conversions usually have a lower environmental impact than new buildings. They can also retain unique design features, including historic buildings “whose character cannot be replicated in new construction,” the report suggests.
Downtown areas of smaller cities “suffer from housing, affordability and accessibility just as much as downtown Portland,” Possert said. “It’s a really common problem, although the solutions might be a little different.”
One success Possert cites is the Palace Hotel in Medford, a former single-occupancy hotel (formerly known as the Dosshouse) in southern Oregon. The hotel provided affordable accommodation from 1893 until it closed in 1972. According to Restore Oregon, commercial activity continued in the hotel’s ground-level spaces. But more than 70 rooms on the upper floor remained unused.
“People in the housing industry start building new buildings immediately. And that’s fine because we have to build, but it’s not the only tool in the toolbox,” she said. “And so this is an opportunity to add more tools to the overall production toolbox. So it might be easier to deal with existing properties, or at least they should be on par with building new builds.”
Fortify Holdings, a developer experienced in converting hotels into apartments, is converting the hotel into 40 smaller apartments that will blend into the existing downtown fabric. The company’s president, Ziad Elsahili, testified on behalf of Marsh’s bill, in part because he would forego a large portion of the system development fees (SDCs) that developers pay when they create new projects.
“This is a huge benefit for developers and could really help offset some of the costs of developing and converting these buildings and leading to more housing options,” Elsahili said.
But some Oregon cities and park counties initially opposed Marsh’s legislation over mandatory waivers of SDCs. In Springfield, a city of 62,000 people about 110 miles south of Portland, the planning team was concerned about losing money upgrading water, sewage and transportation infrastructure. Based on her feedback and that of other cities, Marsh amended the bill to allow SDCs for water and wastewater in some situations.
“We have to think innovatively,” Marsh said. “All of these things need to be on the table.”
