A Guide to Public Policies Supporting Office-to-Residential Conversions

Timea Iancu | Oct 2, 2024

Office market dynamics have fundamentally changed after the pandemic, with hybrid work steadily becoming the new norm. The nationwide rise in office vacancies, coupled with a housing supply shortage, has bolstered the momentum of office-to-residential conversion trends.

In response, federal and local governments have introduced policies to support these conversion projects. Our guide highlights the incentives available in major U.S. cities — use the Table of Contents to jump to your market of interest.

The Evolution of Office-to-Residential Conversions

Since the pandemic, there has been significant progress in the office-to-apartment conversion landscape. The number of apartments created from old office spaces increased from 12,100 in 2021 to 55,300 by the beginning of 2024, according to a CommercialCafe report.

The trend is driven by multiple factors, starting with office vacancy rates climbing to record levels and office utilization plateauing at around 50% to 60% of pre-pandemic levels by the end of 2023, as highlighted in our report. Additionally, 30% of all office loans have recently matured or are maturing by 2026 as of June, according to our Office Market report, indicating an uncertain outlook for office spaces. At the same time, demand for housing continues to rise amid a housing shortage.

In response to these dynamics, converting vacant or underutilized office spaces to residential units emerges as a potential solution in certain situations. This approach offers a way to address the housing shortage while revitalizing office-centric areas by turning them into mixed-use neighborhoods with less time and money than new construction would require. However, adaptive reuse projects come with various challenges, from regulatory hurdles to structural and design constraints.

Public Policies Encouraging Office-to-Residential Conversion

Federal, state and local governments have adopted policies to incentivize office-to-residential conversions, such as tax abatements, relaxed zoning laws and even subsidies. Here are the incentives available to support adaptive reuse projects.

Federal Programs

HUD’s Community Development Block Grant (CDBG) program: Office-to-residential conversions are eligible for direct funding. At the same time, state and local governments can access up to five times their annual CDBG allocation in low-cost loan guarantees to fund such projects.

DOT: The Transportation Infrastructure and Finance Innovation Act (TIFIA) and Railroad Rehabilitation & Improvement Financing (RRIF) programs provide below-market interest rates for housing development near transportation, including conversion projects.

DOE: The Department of Energy offers loans, guaranty programs and tax incentives to fund renovations to reduce emissions and make ‘green’ upgrades to existing commercial buildings.

Technical assistance: All the agencies above provide technical assistance to help developers leverage these tools and may even cover legal expenses.

State Programs

California: The state of California approved in June 2022 $400 million in incentives for commercial-to-residential conversions. This includes $105 million in grants allocated to conversions to affordable housing.

Colorado: The Tax Credit Commercial Building Conversion adopted in 2024 provides refundable tax credits for commercial-to-residential conversions starting between 2026-2035. A cap of $3 million per project is applicable, and the total annual funding can’t surpass $5 million in tax credits.

Wisconsin: A bipartisan bill was adopted in June 2023 to assist developers in converting vacant commercial properties into affordable or senior housing. The initiative provides interest-free loans of up to $1 million to cover the conversion costs.

Zoning changes: Several states have relaxed zoning regulations to facilitate the conversion process, including Florida, Montana, Rhode Island, Washington and Arizona.

Local Programs

New York City

Office Conversion Accelerator Program: Introduced in August 2023, the program assists developers with conversion projects that will create a minimum of 50 residential units. It provides a single contact within city government to help ensure development plans comply with codes and zoning regulations.

Tax Incentives: Adaptive reuse projects south of 96^th Street in Manhattan can benefit from a 90% tax abatement for up to 35 years. To qualify, 25% of the units must be affordable at 80% of the area median income.

The City of Yes for Housing Opportunity: The proposal aims to reduce the age requirement for eligible buildings for conversions from 1961 to 1990 and to allow office retrofit projects in any area where residential development is permitted. The initiative must be voted on by the end of 2024.

Chicago

LaSalle Street Reimagined: In April 2024, the City Council allocated $151 million in public funding to support the conversion of four office buildings, totaling nearly 2.3 million square feet, to apartments within the city’s financial district, LaSalle Street. The project is expected to create 1,000 housing units, 319 of which will be rented at affordable rates.

Tax Increment Financing (TIF): LaSalle Street transformation projects will benefit from TIF assistance. This support is also available for additional conversion proposals that include at least 30% affordable housing units.

Washington, D.C.

Housing in Downtown (HID) Program: The initiative grants a 20-year tax abatement for commercial-to-residential conversions. The program is competitive, with capped funding: from 2024 to 2026 – $2.5 million total, total cap increasing to $6.8 million in 2027 and to $41 million in 2028.

Office-to-Anything Program: The Central Washington Activation Conversion Program encourages office conversions to commercial, entertainment or retail spaces by providing a 15-year temporary tax freeze. This initiative is intended to complement the HID program and does not apply to office-to-residential conversions.

Regulatory Support: Since 2021, several measures have been introduced to facilitate adaptive reuse projects, including accelerated plan review, relaxed zoning regulations and building code modifications.

Boston

The City of Boston Planning Department implemented the Downtown Residential Conversion Incentive Program in July 2023 with the following incentives:

A Payment in lieu of taxes (PILOT) agreement offers up to a 75% abatement on the fair market-assessed residential value for up to 29 years.

Fast-tracked processes for Article 80 reviews and permitting.

As-of-Right zoning applies to residential conversions where applicable, as per PLAN: Downtown.

The program was extended in June 2024 with an additional $15 million in state funding to incentivize larger-scale office-to-residential conversions. The state funding offers up to $215,000 per affordable unit, with a $4 million cap per project.

San Francisco

San Francisco has adopted the Commercial to Residential Adaptive Reuse Program in July 2023, which comprises two initiatives:

Planning Code Adjustments: Changes to the City’s Planning code were made to reduce the hurdles conversion projects may face. This includes exempting downtown buildings from certain housing requirements that are challenging to meet for former office buildings.

Proposition C: This measure offers a one-time transfer tax waiver for properties converted from office to residential, applicable upon their first sale. This benefit is available to buildings approved for office-to-residential conversion before 2030 and is limited to the first 5 million square feet of converted space.

Portland

System Development Charge (SDC) Exemption: Office-to-residential projects are temporarily exempt from system development charges (SDCs) — fees for public infrastructure changes due to building redesign. The waiver applies only to developments that include a required seismic upgrade, the policy covering up to $3 million in SDC costs or the seismic retrofit cost, whichever is lower. The measure is in effect until July 1, 2027.

Seismic Design Requirements: The city has reduced the seismic improvement standards for office-to-multifamily transformations. Projects must adhere to the American Society of Civil Engineers: 41-BPOE (Basic Performance Objective for Existing Buildings) standard, lowering the costs to meet seismic upgrade requirements.

Streamlined Review Process: Portland has implemented a simplified review process to expedite conversion projects by assigning a point of contact for developers, arranging site walk-throughs and offering early assistance meetings.

Seattle

Regulatory Changes: The Seattle City Council has passed a bill that exempts commercial-to-residential conversion projects from certain design review requirements, including rules about the size of floor plates, landscaping and façade standards.

Mandatory Housing Affordability (MHA) exemption: Starting July 2023, adaptive reuse projects are exempt from the City’s MHA requirements, which require larger projects to include affordable housing units. This exemption is available citywide in areas where non-residential structures exist, and multifamily uses are allowed, including downtown, commercial and mixed zones.

Denver

Denver launched in August 2023 the Adaptive Reuse Pilot Program to individually assist developers in accelerating conversion processes. The program includes:

A dedicated Project Coordinator to help applicants through the review and permitting process

Guidance on navigating common regulatory roadblocks for conversion projects

Exploring potential additional incentives to reduce project duration and costs

To qualify, properties must be located in Upper Downtown, be commercial office spaces in buildings at least 30 years old, have a minimum 50% vacancy rate and include residential units after conversion.

Minneapolis

The Minneapolis Council has passed the Office to Residential Conversions Amendment, effective from September 2024, to support developers with conversion projects by:

Reducing review times by 1-2 months

Removing the requirement for a public hearing

Temporarily exempting converted buildings from an affordable housing policy for five years

Pittsburgh

The pilot Pittsburgh Downtown Conversion Program, launched in April 2022, supports converting vacant and aging office buildings in the CBD into affordable housing through tax abatements and funding. To qualify for financial support, at least 20% of the converted building’s units must be affordable to households at or below 80% of Area Median Income (AMI).

The funding amount varies depending on the affordability of the converted buildings’ units:

20% or more units at or below 80% of AMI: $100,000/unit

20% or more units at or below 60% of AMI: $150,000/unit

20% or more units at or below 50% of AMI: $200,000/unit

Office-to-residential conversions can offer a practical solution for repurposing underutilized office spaces. However, the success of these projects relies heavily on the right public incentives and supportive policies, which can help overcome the regulatory and financial hurdles that often accompany such initiatives.

We will monitor this trend and update the article with the latest news on incentives and policy changes as they become available.