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Biden Administration Publishes Guidelines To Encourage Commercial-to-Residential Conversions

54-Page Guide Outlines Federal Resources Available to Developers and Landlords

Commercial-to-Residential Conversions

The Star is a Houston office building that's been standing for more than 100 years and was recently converted into a residential tower. (CoStar)

Cities across the United States are experiencing a housing crunch and many are beginning to promote plans to transform underused office space in central business districts into residential units in hopes they can put a dent into affordability concerns.

Last week, the Biden administration joined the chorus, releasing a guide outlining what federal funding, tax incentives and other programs might be available to convert office spaces, particularly in older buildings, into residential developments.

The White House’s guidebook falls short of serving as an official policy document, and instead offers a possible path to increase the housing supply nationwide.

“Commercial to Residential Conversions: A Guidebook to Available Federal Resources” is a 54-page guide that, according to its executive summary, attempts to address “the unprecedented level of commercial vacancies across the United States.”

The guidebook also states that “commercial conversions are by no means a panacea for our housing supply, affordability, or emissions-related challenges, but if only a small percentage of underutilized commercial buildings were converted to housing, it could create thousands of units of much-needed housing while also reducing the carbon footprint of existing buildings.”

Commercial-to-residential conversion projects have been picking up steam nationwide, according to data released by JLL earlier this year. More than half of office buildings targeted for conversion — 52%, to be exact — were converted into residential uses in 2021 and 2022, compared to a 33% rate between 2015 and 2019, according to JLL.

“Housing affordability crises in major markets are spurring incentives for residential conversions — most gateway markets have created or proposed new incentives since 2020,” according to the JLL report.

Most of the buildings being converted, the JLL report continued, were class B and C buildings that were built in the 1990s or earlier and have more vacancies than lease signings, JLL analysts said.

A CBRE report published earlier this year added owners of aging buildings are facing a decision of whether to offer office space at lower rates, sell the property, demolish the structure or repurpose the edifice.

Several commercial-to-residential conversions are already underway or being considered in Houston, for example — including The Esperson and The Star, two of the oldest towers in Houston’s central business district.

Available Resources

The White House's guidebook was positioned more as a resource for real estate professionals than an actual policy position. The guidebook, accordingly, offered a list of programs and directives, spanning dozens of pages, for any developer or landlord seeking to convert an office building into a residential development.

Some of the federal resources available to developers and landlords pursuing commercial to residential conversions include:

Tax incentives up to $5,000 for residential energy efficiency improvements,

Up to 30% tax credit for renewable energy projects,

Below market interest rate loans for zero emissions buildings attached to virtual power plants.

The guidelines also offered examples of specific projects that received federal funding or incentives for commercial to residential conversions.

One of those projects was The Residences at 150 Bagley in Detroit, an office building that came online in 1935 but was mostly vacant since 1983. The building’s owners received federal assistance in 2022, as part of a plan to convert the office building into a mixed-use development with 100 one-bedroom units, 48 two-bedroom units and 10,535 square feet of commercial space on the ground floor and basement.

The Department of Housing and Urban Development provided $42 million in mortgage funding and $12 million in rehabilitation credits, covering most of the project’s $80 million budget.

The developer only had to commit $4.1 million in cash after state and local funding sources were secured for the project.

Federal funding and tax incentives were also implemented for a $26 million conversion project in Lubbock, Texas.

Lubbock’s tallest building, the 20-floor Great Plains Life Insurance Company tower, was built in 1955 but severely damaged by a tornado in 1970 — leaving most of it uninhabitable. The building, now called Metro Tower Lofts, was renovated earlier this year and, with federal funds and tax credits, converted into a residential tower with 99 apartment units, 24 of them offered at market rate and the remaining 75 classified as affordable.

The White House guidelines, in all, listed 21 federal programs offered by the Departments of Energy, Housing and Urban Development, Interior, Transportation and Treasury, as well as Environmental Protection Agency and U.S. Department of Agriculture. The specific programs include loan guarantees by the departments of Energy and Transportation, tax credits by Department of the Interior, grants by the EPA, technical assistance by Housing and Urban Development and tax deductions by the U.S Treasury.

Houston Office Conversions

Rick Goings, a senior director at JLL’s Houston office, said there are many developers looking into converting older properties into residential developments in the Bayou City, but only a few have actually been converted or bought for future conversion.

One of those conversions was the old Texaco building, now known as The Star. The former office building at 1111 Rusk St. in Houston was converted into a 286-unit apartment building a few years ago and is 93% occupied, according to CBRE, the brokerage firm hired to sell the building.

Provident Realty Partners bought The Star in 2013 and redeveloped it as a 16-story and 286-unit apartment complex with 26,000 square feet of retail space and 672 parking spots.

Another office building being converted into a residential development is 1801 Smith, a 20-floor office building that was converted into a 372-unit residential tower and set to open within the next few weeks.

Other commercial to residential conversion projects possibly underway in Houston include Three Westlake, 1021 Main Street, 800 Bell and The Esperson, the historic office high-rise that once was the Bayou City’s tallest building.

Goings said developers are mostly targeting older towers for conversions, with the ideal building being rectangular or boxy, in shape. Triangular or other oddly shaped buildings, he added, are less efficient and often have spaces that can’t be converted for residential uses.

Commercial-to-residential conversion can serve as a solution to the nation’s housing shortage, Goings said. But such conversions tend to be expensive, he said, so the best way for office buildings to become a residential tower is for private developers and public agencies — be it the federal government or local City Halls, to work together.

Future of Conversions

Office-to-residential conversions such as the one at The Star have been trending in several major cities across the country in recent years. Many older office buildings in the Bayou City in particular are being targeted for residential conversion, particularly as tenants seek newer, amenity-rich, Class A buildings, according to a January blog post published on the Greater Houston Partnership website.

Another factor in the office-to-residential conversion trend is the increased office vacancy due to pandemic-induced remote work.

“These projects have the capacity to help change the ecosystem of downtown Houston, bringing new residents and hotel guests as well as the foot traffic that will trigger additional retail and other uses," the Greater Houston Partnership blog post said.

A CBRE report on office conversions said the transformations, though growing, are still relatively small in number compared to the universe of office properties.

“Despite the robust pipeline, conversions alone won’t measurably decrease the surplus supply,” CBRE analysts said in their office conversion report. “Even if every planned office conversion is completed, together with the conversions completed since 2016, only 91.1 million square feet would be removed from the market, roughly 2% of total U.S. office inventory.”

The CBRE report added most office conversions are happening in coastal markets and the Northeast, specifically in cities like Boston, New York City, Philadelphia, San Diego and the San Francisco Bay Area.

Many office buildings are targeted for conversion to apartments, with CBRE finding 89 towers were converted into 14,000 housing units since 2016. But office buildings could also be converted into hotels and life sciences labs for research-and-development, according to CBRE.

The Bipartisan Policy Center said conversion costs could be high but might not be as expensive as building a housing development from the ground up, especially in a central business district.

“Repurposing existing buildings also has the potential to save developers time and money, depending on the project,” said a Bipartisan Policy Center report on commercial to residential conversions, published in July. “Estimates for how much cheaper vary, as any potential savings depends on the original structure of the building. Good candidates for conversion to residential — especially smaller, pre-war buildings with more natural light, higher ceilings, or operational windows — may be as much as 30% cheaper to convert than to demolish and rebuild.”

There are challenges for commercial to residential conversions, including structural issues (plumbing, unit layouts, electrical configurations) and zoning.

Converting office buildings to residential developments, ultimately, are a step in the right direction but not necessarily the “silver bullet” solution for housing affordability or shortages, according to the Bipartisan Policy Center.

“Even if cities are able to overcome these challenges and complete widespread conversions, office space alone will not be nearly enough to meet most cities’ housing needs. Downtown areas are generally a small fraction of land in U.S. cities,” the Bipartisan Policy Center’s report on commercial to residential conversion said. “For example, San Francisco recently set a goal of creating 82,000 new housing units within the city by 2031, but research put the number of potential units that could be created by converting vacant office space at approximately 11,200 — a step in the right direction, but by no means a silver bullet to solve the housing shortage.”

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