Downtowns are struggling with twin problems: too much empty office space and not enough housing.
Well, it turns out that in practice, “adaptive reuse” is complicated. And expensive. Still, many major cities are giving it a try — but not necessarily at a scale that will make a serious dent in either problem.
Problem No. 1: too much office space
At the start of the pandemic, a lot of office workers began to work from home. More than three years later, it’s become obvious that many are never going back to the office full time. In July, 12% of full-time employees were working remotely and 29% were in hybrid arrangements, according to the most recent survey from the Working From Home Research Project (run jointly by several universities).
When workers stay home (and as tech workers are laid off), companies begin shrinking their office footprint, shedding leases as they come to term. As a result, office vacancies remain high: The U.S. office vacancy rate in July was 17.1%, an increase of 1.8 percentage points since July 2022, according to the most recent National Office Report by CommercialEdge, a commercial real estate software company that tracks office vacancies.
So while there is unused office space, converting it into housing involves lots of money and lots of red tape. And there may be fewer practical opportunities than you’d think. Steven Paynter, an architect at Gensler, a San Francisco-based architecture firm, created an algorithm to assess the feasibility of conversions and found that only 30% of existing offices in the U.S. and Canada would be structurally viable for conversion.
Still, many major cities are undergoing office-to-housing conversions — or are, at least, proposing them — and they include Atlanta, Chicago, Houston, San Francisco, Seattle and Washington, D.C. In New York City, a developer is transforming a lower Manhattan building that once housed both the New York Daily News and JPMorgan Chase & Co.
JPM,
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into 1,300 apartments. This helps problem No. 2, but perhaps not in a significant way.
More: ‘1.5 billion square feet of office space could become obsolete,’ says Boston Consulting Group
Problem No. 2: not enough housing
This is referring particularly to affordable housing. This was a long-term trend that the pandemic — particularly early on, with its concurrent spikes in rent prices and unemployment — only made worse. The National Low Income Housing Coalition says there’s a shortage of 7 million affordable homes for 10.8 million extremely low-income families. Meanwhile, the largest group of would-be home buyers are middle-income earners who can only afford 23% of listings on the market, according to a June housing analysis by the National Association of Realtors and Realtor.com.
More housing is the obvious answer to a housing shortage and for lowering purchase and rental costs — and also for potentially helping to ease a crisis of urban homelessness. But urban areas, specifically downtowns, have scarce land and an abundance of zoning regulations.
So, can office-to-housing conversions play a material role in solving the housing crisis? And will these conversions bring new energy to depressed downtowns? To gain insights into these big questions, NerdWallet turned to Tracy Hadden Loh, a fellow with The Brookings Institution’s Brookings Metro — a nonprofit think tank — and co-author of the paper “Myths about converting offices into housing — and what can really revitalize downtowns.”
We discussed what’s happening in downtowns, the challenges with office-to-housing conversion, what needs to happen to revitalize city centers, the affordable housing crisis and why suburbs might be the sleeper opportunity to convert office buildings into housing.
The following interview has been edited and condensed for length and clarity.
NerdWallet: This isn’t the first time cities have seen office vacancies in downtowns and other areas, too. Can you point to some other instances and explain why this situation is different?
Tracy Hadden Loh: When really devastating disruptions happen, it causes these fluctuations in the office market. But in the past, the office worker has recovered. Another really different example of there being a glut in the office market is that in the 1980s, the real estate industry functioned a little bit differently than it does today because of some differences in the U.S. tax code. And during that time period in a bunch of markets, developers built what’s called spec office — spec being short for speculative. So they just built office buildings even though they didn’t have a tenant who had already told them they were going to move into the building. They were just building it and they were like, “Go do something with it.”
NerdWallet: If you build it, they will come.
Tracy Hadden Loh: Right. And so I’m sure you can imagine that this caused a huge glut of oversupply in the market because people just built all these office buildings and were just like, “Something is going to come along,” and something didn’t always come along. And so a lot of this product just kind of sat there. But eventually it was taken up by growth and the market.
It didn’t sit there empty for literally forever; it just took time. Eventually somebody leased it and new construction stopped. Then [governments] made changes to the tax code to stop the speculative building.
What’s different about today, as opposed to those other situations that I mentioned, is that it’s happening at a time when there is this structural shift in demand for office space because of the flexibility of remote work. There’s been this big drop in the number of square feet per worker that office employers are using now. And then there are higher interest rates, as well. Those are an unprecedented combination of factors that we haven’t seen in the office market happening at the same time.
More: America’s cities have a ‘once-in-a-generation’ opportunity to convert office space to apartments — now comes the hard part
NerdWallet: Does it seem like office building owners are trying to wait out office vacancies at this point, or are they looking around and saying “What else can we do?”
Tracy Hadden Loh: It depends on the owner; some are more anxious than others. Some of them are richer than others and can afford to wait longer. If an office owner is like, “I don’t want to wait out a vacancy, then I’m going to maybe take advantage of some subsidies from the government or tax breaks — whatever it’s going to be.” But it’s still going to be pretty expensive to convert offices into housing. So you’d have to make it worthwhile to convert.
NerdWallet: What does it take to make it pencil out for a developer?
Tracy Hadden Loh: Everything is expensive: the cost of labor is higher, supply chains are in trouble, materials are more expensive than ever. Everything’s expensive — even converting your office building into a nicer office building is. Converting it into housing would be expensive. Doing nothing is expensive. It’s just kind of a tough situation right now; we’re in a high-cost environment.
The issue with the office-to-housing conversation is that people are kind of pushing a whole bunch of problems together at once, which won’t necessarily yield a rational solution that matches the problems.
NerdWallet: The report unpacks a lot of myths about housing conversion and in downtown areas especially. One of the myths is that downtowns have too many offices when in reality it’s that downtowns have too little of everything else. Can you explain what everything else is?
Tracy Hadden Loh: It’s absolutely housing — just to be clear. But it’s also restaurants, clubs, venues, entertainment venues, sports facilities, schools, hospitals.
NerdWallet: Like all the other amenities as well. That kind of makes up a neighborhood?
Tracy Hadden Loh: I mean, I wouldn’t even describe those as amenities. What do people do all day? It’s a lot more than just work and sleep, right? Work and sleep means offices and housing. But what about everything else? The trend, globally, is that productivity is going up. People have more time and more money to spend doing things that aren’t working or being at home.
I think sometimes it’s easy for people to just say there’s nobody downtown. It’s like a ghost town and they’re not necessarily thinking about the other businesses and things that were supported by community workers, for example, as well as the city transit systems and how vacancies are impacting those things as well.
NerdWallet: If you start bringing in either new housing or converting housing, is the logical next theory here that it will bring the entertainment centers, it will bring the venues, it’ll bring the hospitals and schools and other things like that to an area — a different kind of “if you build it, they will come” scenario?
Read: Converting massive amounts of offices to apartments is a ‘pipe-dream,’ expert warns
Tracy Hadden Loh: I do think that adding housing in and around downtowns makes sense. Residential is actually a pretty low density land use compared to other land uses like office or retail or entertainment. Land in this central, highly accessible area is very scarce and that’s why all this stuff is in these locations, right?
But generally speaking, downtown is all about proximity and accessibility. And so making sure that there’s a really good supply of housing near all the stuff absolutely makes sense. But the housing is not a substitute for the stuff.
NerdWallet: Let’s talk about affordability. Usually when you build more housing, rents will go down, right?
Tracy Hadden Loh: That is how it works.
NerdWallet: But creating new housing in downtown areas and bringing in all these other new things, new businesses, etc., it seems like it could draw young professionals with disposable incomes away from other areas of cities and potentially alleviate some of the rent pressure in the areas they left. Is that kind of a hypothesis accurate or is it like not quite there?
Tracy Hadden Loh: Yeah, it makes sense and that’s what happened the last time that cities built a bunch of new housing in and around their downtowns. But it also depends on what you build, right? Like you mostly build stuff that’s for rent that is actually going to attract and serve a different segment of the population. If you build stuff that’s for sale and you build smaller units then that also serves a different segment of the population.
Plus: Mortgage rates could hit 8%, economists say, citing a worrying sign not seen since the Great Recession
NerdWallet: I know some cities also require a percentage of new housing to be affordable housing with below market rents. But a small percentage of new housing while adding much more potentially expensive housing in downtowns seems like a drop in the bucket in terms of meeting affordable housing needs. Can you speak to the myth of office-to-residential conversion as the key to solving the housing crisis?
Tracy Hadden Loh: The housing crisis at its core is caused by not having enough housing where all the jobs are and there’s no way to subsidize our way out of that or get somebody else to pay for the solution. We just need more housing near where jobs are and that’s it. So office-to-housing conversion can provide us some small percentage of that, like maybe 10%. But we need to also build the other 90%.
We got into this situation by not building enough housing for literally decades in the places where there was a lot of job growth. The only way out is to build a lot of housing — like decades’ worth.
We’re certainly not going to get out of it by using public money to create some tiny number of artificially cheap housing units some very lucky people will get to live in — because what about everybody else?
NerdWallet: That’s why those lottery systems are pretty frustrating — all it is showing you is that there just isn’t enough housing.
In cities that are supporting office-to-housing conversions, are those cities going to be easing, permitting or regulatory provisions that would allow for the creation of weirder apartments — I mean those that aren’t 100% fitting code like having windows in bedrooms? I just hear people saying, “Why can’t they just turn all of these empty offices into housing?” And all I can think is of the plumbing alone. Housing and commercial spaces are just very different.
Tracy Hadden Loh: If we made it easier to build housing, people would build more of it and then more people would have places to live. It is kind of a no-brainer. And yet we don’t do it because we have this incumbent bias where we’re like, “Well, I have somewhere to live.” And so new housing would be “for other people.”
NerdWallet: Seems like it comes down to a space issue, too, right? It’s always easier to say let’s build up, except there are areas with limits to how high you can build, for example.
Tracy Hadden Loh: In the most accessible and highly desirable areas, location is scarce. Yes, that’s one of the reasons why building housing there is expensive.
NerdWallet: So empty offices are sitting on pretty expensive land. Would it just be easier, with the challenges to convert to housing, to knock down a building and restart with the intent for it to be residential? Or is that impractical?
Tracy Hadden Loh: You have to keep in mind — especially with the cost of materials right now — that even when you do the demo, all you can salvage is the steel and the concrete slab. Steel and concrete slabs are expensive. So it would have to be just like a very, very particular kind of a building for demolition to be worth it to save any money.
But there are a lot of low-rise offices in suburban locations that are highly accessible. These suburbs are desirable places to live. That’s the real office-to-housing conversion opportunity.
Those will be many orders of magnitude bigger than the downtown conversion opportunity. And it will be primarily driven by demo. The offices will just be torn down and then much taller apartments will take their place.
NerdWallet: And they’re usually near those desirable areas that are also near some kind of public transportation.
Tracy Hadden Loh: Yeah, because that’s where the jobs were.
NerdWallet: What would actually need to happen to alleviate unaffordability in urban centers that lock out middle-income and lower-income populations?
Tracy Hadden Loh: There are two things that are going on right now at the same time. One is we’ve got to build housing near where our jobs are in order to address demand. And we need to build lots and lots and lots of it. And there are some metro areas that are doing this, like Austin, Miami, Dallas and Houston. I’m not saying they couldn’t be doing even better, but they’re building a lot in sunbelt metros. They have a lot of jobs, their economies are growing and their housing is also growing, so they’re remaining affordable.
The other thing is that jobs can relocate. People can leave high-cost areas where there’s nowhere for their workers to live. Right. And they can go somewhere else. The rise of remote work increases mobility.
NerdWallet: And we’ve seen some of that already.
Tracy Hadden Loh: Yes, this is not a hypothetical.
Also read: Want to rent in Manhattan? You’ll have to spend nearly $70,000 a year.
NerdWallet: We saw an acceleration of that movement as well — the rise of remote work during the pandemic is why a lot of our offices are vacant in downtown areas. But also companies are probably wondering, “Why am I going to be leasing this when my workers aren’t even living here?”
Tracy Hadden Loh: Yes. Employers are going to locate where it makes sense for them to locate. They want to locate in places where they’re going to be productive and where they can get workers. And that’s the puzzle that employers are always trying to solve. For the innovation and knowledge economy, that’s still going to be in cities. And so what cities need to do is increase their competitiveness and lean into their inherent value proposition, which is housing and jobs. It’s not just jobs and it’s not just housing. But that’s what suburbanization was all about: “What if we have one set of jurisdictions that are just housing and another jurisdiction that just does jobs?” And people don’t want to live this way.
NerdWallet: What are city and state governments doing to allow for office-to-housing conversions and more housing, in general?
Tracy Hadden Loh: Taking a comprehensive look at the zoning, the building code, the tax structure, permitting and fees.
NerdWallet: Because there’s a lot of red tape involved.
Tracy Hadden Loh: Yes.
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Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.
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