Last month, the Biden-Harris administration announced a series of policies. action It was designed to make it easier to convert vacant office properties to residential use.National office vacancy rate rises in the second quarter of this year 18.2%According to CBRE, this is the highest price in 30 years.
Meanwhile, the United States faces a severe shortage of available housing. As of the fourth quarter of 2020, Freddie Mac projects a loss 3.8 million units Necessary to meet housing demand and maintain vacancy targets.The National Low Income Housing Coalition also estimates there is a housing shortage in the country. 7.3 million Affordable rental housing available to people with extremely low incomes.
Supporting office conversions with federal funding and guidance seems like a course of action that could solve both problems, but the challenges make many office conversions impossible. commercial real estate Even residential buildings. Even if it made logistical and financial sense to repurpose all office buildings, doing so would only provide a fraction of the housing the country needs. New funding, low-cost lending and guidance could help redevelop some vacant properties, but further action may be needed to meaningfully increase housing supply. be.
Plans for the Biden-Harris Administration
Activities aimed at supporting the redevelopment of office buildings include:
- Low-cost financing for housing developments near public transportation: The Department of Transportation has released guidance on how to use $35 billion in loans to fund housing projects near public transit, including the reuse of office space. A White House fact sheet states that available low-cost funding could encourage zoning improvements among state and local governments.
- Free transfer of property from transit agency to affordable housing developer: DOT will allow transit agencies, which often own real estate near transit hubs, to transfer unused properties to affordable housing developers for free.
- HUD funding for office-to-residential conversions: The new program will make $10 billion in Community Development Block Grant funds available for the acquisition and conversion of commercial properties into residential and mixed-use projects. Additionally, the transformation project is currently subject to the Pathways to Housing Removal Program, which has set aside $85 million to remove barriers to affordable housing development.
- Resources, training opportunities, and technical assistance: The White House announced that Guidebook for converting commercial land to residential land It details 20 federal programs that can assist developers with grants, low-cost loans, loan guarantees, tax incentives, and more to make conversion projects financially viable. A related training workshop will also be held this fall.Ministry of Finance report It also details the tax benefits available for redevelopment, including deductions for energy improvements. The available incentives do not extend to credits for conversion costs, as previously proposed. Downtown Revitalization Actdied in Congress.
Benefits for commercial real estate investors
Not all office buildings are ripe for conversion, but some projects may be cheaper or take less time than new construction.Bipartisan Policy Center Note Retrofitting an older, smaller building with plenty of light, working windows, and high ceilings can potentially save investors up to 30% compared to demolishing and rebuilding.Conversions tend to be environmentally friendly and are ready to rent 12 months early than new developments.
For some commercial property owners, converting vacant office space can be financially advantageous, especially when compared to selling.barclays analyst estimate Office building values are already down 20% to 30% from their peak, and with vacancy rates higher than after the global financial crisis, further declines are expected. Newly available low-cost financing options may allow investors to convert low-value office properties into profitable mixed-use properties. housing complex.
In some cities, government support has been effective in promoting large increases in housing supply through office-to-residential conversion, but the best results have been achieved through direct subsidies and tax breaks. That was when it happened. For example, as a result of his 10-year tax cut for the conversion of Philadelphia; 54% The repurposing of more than 40 office buildings increased Center City’s population from 2000 to 2020.
A new federal plan to support conversions does not include similar tax breaks. And investors face a variety of challenges when considering the conversion of office buildings.
Barriers to meaningful impact
Some cities are in dire need of more housing, but downtowns account for only a small percentage of city land, so converting vacant office buildings will largely eliminate the housing shortage. I wouldn’t be able to do that.
brookings Converting every viable office building in Denver would only create about 1,500 new units, providing up to 11% of the housing needed to close Denver’s deficit. San Francisco has only 12 office buildings eligible for conversion into multifamily housing, which would provide the city with about 2,700 units. This will meet just over 3% of the city’s housing needs.
The reason so few office buildings are suitable for reuse is because the high costs of making the necessary physical changes cannot be recovered through rental income. For example, if the floorboards are deep, it may be difficult for natural light to enter, making it unusable as a living space. And changing plumbing to add a bathroom is rarely an easy process.
These changes may be costly up to $500 According to CBRE’s 2022 estimates, multifamily properties generate an average of $0.50 more per square foot in net operating income than office buildings.
Obtaining zoning approval can also be a barrier. The Biden administration’s policy statement aims to encourage “state and local governments to improve zoning,” but that won’t happen overnight.
And there are other challenges for investors. Convertible buildings may be located in areas that lack important amenities such as grocery stores or schools, making them less desirable places to live. In fact, CBRE estimates that 80% of the occupancy decline over the past few years has been concentrated in just 10% of the nation’s office buildings. And those buildings tend to be located in downtown areas, which suffer from high crime rates and lack of neighborhoods. Amenities.
In these areas, conversion to mixed-use retail and residential use may be an option. A variety of new businesses could attract residents. Although mixed-use projects make up a smaller portion of conversions than office-to-multifamily projects, they are growing in popularity, and CBRE suggest Converting to mixed-use could bring economic benefits to cities.
Sean Slater, senior principal at RDC, said in a BiggerPockets article: interview “Mixed-use is the past, present and future,” he said this spring, noting that the transition to mixed-use would “create a more stable market.”
New policies and guidelines from the Biden administration could allow more office building conversions, but projects made possible with low-cost loans and other incentives will fall short of meeting cities’ housing needs. is likely to be insufficient. Additionally, revitalizing downtown requires more than simply adding new housing.
Still, some property owners may find the new policy makes office-to-residential conversion projects a viable solution as more and more office leases are expiring.
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Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.