The Biden administration today revealed a suite of federal resources—including low-interest loans—to assist commercial to residential conversions that increase housing supply, revitalize urban downtowns, and cut climate pollution. (White House fact sheet; Bloomberg, Oct. 27).
Holistic Federal Strategy
Roundtable President and CEO, Jeffrey D. DeBoer said, “The pandemic’s indelible impact on where Americans live and work continues to reverberate through the real estate industry, which is at the center of this societal transition. The Roundtable supports innovative policy that reimagines the adaptive reuse of CRE, rejuvenates affordable housing and urban downtowns, and addresses the climate crisis. The guidance released by the White House today checks all these boxes—and bolsters our agenda to improve the health of our cities, local tax bases, and small businesses.”
Among the actions announced today, conversion projects located near mass transit hubs would be eligible for low-interest financing under U.S. Department of Transportation programs. “TIFIA” and “RRIF” loans are pegged to US Treasuries at 5.03 percent interest (today’s rates).
Transit-oriented projects supported by TIFIA and RRIF financing do not require affordable housing units—although they can be “stacked” with projects supported by low-income housing tax credits and local laws may have independent inclusionary zoning mandates. (FAQs on project eligibility)
The White House announcement also directs the General Services Administration (GSA) to identify “surplus” federal properties that private developers may help to convert to housing.
A fact sheet summarizing the administration’s actions indicates that training workshops will be held this fall for real estate owners, developers, and lenders on how to use federal programs included in the White House’s new “Commercial to Residential Conversions” guidebook, which describes how 20 programs across six federal agencies can be used to support adaptive re-use projects.
The Administration’s guidebook also explains how mortgage insurance and grants from the Department of Housing and Urban Development (HUD) can leverage state, local, and private sector capital as layers in the capital stack to support adaptive reuse.
Adaptive Reuse a “Win-Win”
Real estate market conditions with high office vacancies “present[ ] an area of opportunity to increase housing supply while revitalizing Main Streets,” said National Economic Council Director Lael Brainerd. “It’s a win-win.” (POLITICOPro, Oct. 27) (WH Council of Economic Advisors blog post)
White House efforts to assist property conversions lands as national office vacancy stands at nearly 18 percent—with some major metro areas experiencing vacancies higher than one-fifth of their entire inventory—according to a report from analytics firm Yardi Matrix released on Thursday. (Commercial Observer, Oct. 26)
Architectural firm Gensler released a report on Monday that estimates 25% of under-performing U.S. office properties are suitable candidates for conversion projects.
The initiative builds on the Biden Administration’s announcement last July to boost the nation’s housing supply. (Roundtable Weekly, July 28). The Roundtable will continue to serve as a conduit between our members and the Biden Administration to help design impactful policies that can assist with office to residential conversions.
Recent CRE research shows an increasing number of colleges and universities are acquiring office buildings for adaptive reuse. Meanwhile, an overall surge in U.S. office-conversion projects scheduled for completion this year represents more than double the average annual pace. Federal, state and local conversion-incentive programs could play an important role going forward. (New York Times, Oct. 3 and CBRE, Rise in Office Conversions May Help to Reinvigorate Cities, Sept. 27)
Data from JLL cited in this week’s New York Times article shows dozens of U.S. institutions of higher education have bought office buildings since 2018—including 49 four-year private schools and 16 four-year public institutions—often for conversion to academic use.
Separately, CBRE research published Sept. 27 shows that a surge in office-conversion projects in major U.S. cities this year (nearly half of them in the multifamily sector) may help urban economies recover after the pandemic-induced shift to hybrid working. (Commercial Property Executive, Oct. 2 and GlobeSt, Sept. 29)
The CBRE report shows that 60 million square feet of office conversions are planned or in progress in 40 U.S. markets, which represents 1.4 percent of the nation’s office inventory. The report also notes that, despite a variety of government incentive programs, adaptive reuse is not a panacea for problems facing the U.S. office market, especially in a high interest rate environment.
Role of Policy
An Oct. 16 discussion during The Roundtable’s Fall Meeting in Washington, DC will address policy initiatives impacting building conversions, and other challenges facing CRE, during The Roundtable’s Fall Meeting in Washington, DC.
The Roundtable strongly supports policies that provide incentives for office-to-residential conversions. Last Dec, The Roundtable urged the Biden administration to support “legislation to facilitate the increased conversion of underutilized office and other commercial real estate to much-needed housing.” (RER letter to President Biden, Dec. 12, 2022 and Roundtable Weekly, Aug. 11, 2023)
This week, Roundtable Senior Vice President Chip Rodgers joined a group of business groups’ representatives to brief the staff of the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, and the Subcommittee on Capital Markets.
The Oct. 2 briefing emphasized the need for policymakers to address dislocations in the office market by 1) incentivizing the conversion of outmoded office properties to residential use to help meet the nation’s housing needs; and 2) requiring federal government workers return to their offices.
Federal government programs will incentivize local jurisdictions to pursue office-to-residential conversions, according to CBRE. Federal incentives also aim to encourage financing mechanisms to build and preserve more housing, while reducing land-use and zoning restrictions for affordable and zero-emissions housing. (CBRE, Sept. 27)
A Real Estate Roundtable property conversions working group has worked with lawmakers for several months on draft legislation to create a tax credit for converting older commercial buildings to housing.
The conversion of former offices to apartments reached an all-time high in the last two years—40% of all existing building repurposing projects—reflecting a rapid increase in “adaptive reuse” throughout the nation, according to a Nov. 7 RentCafe analysis of Yardi Matrix data. (Download pdf or see website)
Large cities such as Philadelphia, Cleveland, and Pittsburgh have embraced conversion projects to repurpose old buildings and unused office spaces, according to the report. (BusinessInsider, Nov. 8)
Offices are the largest share of all building types undergoing conversion, representing 28% of future apartments, followed by hotels (22%) and factories (16 %).
As building occupancy levels remain depressed due to lingering remote working arrangements, cities such as New York, Los Angeles and Chicago are proposing plans to relax building rules and create tax incentives for property owners undertake conversions. (Axios, Sept. 28)
A Roundtable-led coalition of 16 national real estate organizations on Oct. 12 recommended certain enhancements and expansions to a 20 percent tax credit for qualified property conversion expenditures, which is part of the Revitalizing Downtowns Act (S. 2511, H.R. 4759). The recommendations include expanding the category of properties eligible for the credit to various types of commercial buildings such as shopping centers and hotels.
The coalition letter also emphasized the significant obstacles that the industry continues to face with conversion projects. Obstacles that frequently arise include property acquisition, permitting, development review, toxic contamination, property age and code conformance, and a “not in my backyard” (NIMBY) sentiment. Additionally, the structural elements of an existing structure—columns, beams, floor layouts and size, ceiling height, etc.—often pose hurdles that add cost and extra delays to an otherwise desirable repurposing of a building. (GlobeSt, Oct. 12 and Roundtable Weekly, Oct. 14)
The letter to the bill’s sponsors, Sen. Debbie Stabenow (D-MI) and Rep. Jimmy Gomez (D-CA), offers several recommendations to help ensure the legislation drives additional economic investment and brings down housing costs.