Rockland Trust Co. provided $5.1 million in financing for conversion of the Henry Gustavus Dorr building at 281 Franklin St. in Boston into 15 apartments under Boston’s downtown office-to-residential conversion tax incentive program. Photo courtesy of Rockland Trust Co.
Massachusetts has a housing shortage, and there are plenty of underutilized office buildings in Boston’s urban core. At first glance, it seems like a no-brainer for housing conversion projects.
Maybe not so fast.
As the national commercial real estate industry continues to grapple with a pandemic hangover sending office vacancy rates to their highest levels in recent memory, the potential for residential conversions is at the top of mind for many brokers, developers and municipal leaders.
Nearly 70 million square feet of office space – or 1.7 percent of the national supply – was undergoing conversion to other uses over the first three months of this year, according to CBRE. That’s up from the 60 million square feet of conversions taking place in the office sector in the third quarter of last year.
Conversions to multifamily use account for 63 percent of the office conversions either planned or currently underway, according to the same CBRE report. And this year, fully one-third of the 120 office conversions slated for completion across the country are destined for multifamily in their new life. But despite the momentum, there isn’t necessarily equal wind in the sails in some of the country’s historically top commercial real estate markets.
Cleveland Punches Above Its Weight
Of the top 10 markets for planned or underway office conversions, Cleveland has the highest percentage of total office inventory – at 11 percent – slated for conversion or already in the process of converting. Houston, at 6.2 million square feet, has the most office square footage primed for conversion to other uses.
Other cities and markets in the top 10 include Cincinnati, New Jersey, Phoenix and Minneapolis-St. Paul.
Boston didn’t make the top 10.
Boston’s Office to Residential Conversion Program has received 11 applications to convert a combined 15 office buildings to residential use — taking a total of 500,000 square feet out of the office market. The combined conversions, if all were to move ahead, would create 507 units of housing — 102 of which would be designated affordable.
A RentCafe study from earlier this year notes that Washington, D.C., New York City, Dallas, Chicago and Los Angeles, respectively, have the highest office-to-apartment pipelines in the country.
In that study, Boston doesn’t even crack the top 20.
“While the concept of converting office spaces to residential units is appealing, the reality can present significant challenges,” said Michelle Landers, executive director of the Urban Land Institute’s Boston/New England chapter. “The most important aspect of a viable office to residential conversion is having a floor plate that is conducive for this type of conversion, which is hard to find.”
A 2023 study by design firm Gensler estimated between 3 million and 5 million square feet of office space in downtown Boston could be convertible into housing. iStock photo
Up to 5M SF Potential in Boston
Why can’t Boston catch an office-to-multifamily conversion break? Experts note Boston’s historic building inventory often means offices aren’t rectangular blocks and therefore harder to convert into residential developments. A 2023 Gensler study examined 90 downtown Boston office buildings and found only 30 to 40 of those were conducive to even study for residential conversion.
But that still means 3 million to 5 million square feet of potential convertible office space into much-needed housing inventory.
“It may not be the silver bullet [to solving the region’s housing crisis], but it is another key step forward as we address the need for more housing in Boston and beyond,” Landers said. “Projects that encompass a diverse range of housing – whether high-end, affordable, or aimed at middle-income residents – will play a crucial role in fostering a balanced and inclusive community in the long run.”
Further, there’s ample reason for owners of non-class A office space to consider conversion.
Greater Boston’s overall class A office vacancy rate at the end of the third quarter of this year stood just shy of 23 percent, according to a market snapshot from Colliers. But the class B vacancy rate was a little more than 26 percent – a narrowing vacancy gap compared to earlier quarters coming out of the pandemic but still a sign tenants are preferring higher-quality office product.
Further, a study last year from the University of Toronto’s School of Cities, cited in the Gensler study, found foot traffic in Boston’s Financial District was just over half of pre-pandemic levels.
Converting some of that empty office space to residential developments can work well for overall neighborhood vibrancy, the thinking goes.
“Ultimately, insights from experts and residents alike suggest that a bustling downtown is key to a city’s overall success,” Landers said. “Increasing the residential population in currently vacant spaces can transform the atmosphere of the area, infusing it with life and activity, especially during evenings and weekends. This increased presence not only enhances local businesses but also fosters a sense of community, making downtown a more inviting and dynamic place for everyone.”
Affordability Requirements a Hurdle?
With Boston not even cracking the top ranks of cities and real estate markets planning office conversions, it appears some kind of incentive is needed to make these projects work – especially with high interest rates still muting commercial real estate activity across the country.
San Francisco Mayor London Breed has proposed reducing affordable housing requirements and impact fees to boost office-to-residential conversion projects in her city.
New York City’s zoning policies offer more flexibility for office-to-residential conversions and provides bonus density to developers who comply with more aggressive affordable housing requirements, Gensler notes. This combination enables more residential projects to pencil out amid the city’s high development costs.
Could Boston developers expect a fresh wave of incentives in their own backyard to help office-to-residential conversions pencil out? The city’s Downtown Office to Residential Conversion Pilot program is a proactive step, Landers said. The program reduces tax bills by 75 percent on average for up to 29 years for eligible projects and also includes other incentives like potential bonus height and as-of-right zoning.
Boston Mayor Michelle Wu told Banker & Tradesman this month the city hasn’t put forward any additional property tax incentives to fuel conversions, but there are discussions underway on how to layer accelerator funds and other opportunities to boost housing production across the city.
“We are already having conversations with individual project proponents that are very close to being able to get shovels in the ground about what other tools are possible that the planning department could offer,” Wu said.
Banker & Tradesman Associate Editor Steve Adams contributed to this report
