It’s becoming clear that things are going to get worse in downtown Boston before they get better despite the city’s office-to-residential conversion pilot program and its efforts to bring more retail and restaurant operators with established followings downtown.
The scale of the class B vacancy problem is so huge, and Boston Mayor Michelle Wu’s biggest relevant policy response – the office conversion pilot – is so limited, that the city will surely see a wave of value destruction in this asset class before too long.
According to Colliers data provided to Banker & Tradesman, the vacancy rate in class B space downtown is a stunning 27.3 percent right now. That’s between nine and 12 percentage points higher than it ever was at the worst moments of the Great Recession, the dot-com bust or the Savings & Loan crisis, and the rate of increase so far shows no sign of slowing.
The office conversion pilot’s almost impossibly-short time frame, by real estate standards, and the limited amount of money involved – one real estate industry leader experienced in this kind of conversion program estimated the tax breaks will cover at best around one quarter of the project cost at a time when very few real estate projects can pencil – mean only a limited amount of class B space will be taken off the market this way.
Indeed, the city publicly and privately estimates that it will only get between two and five office buildings to convert to an uncertain number of housing units. In fairness, city officials appear intent on making sure these conversions succeed by interceding with lenders and providing an unprecedented amount of help to speed permitting along. A certain amount of state financing, like the proposed new state “green bank,” will likely be available to help fund conversions, too. The SPACE program for new retailers should also help make downtown exciting for the office workers who remain. And the elephant in the room – the MBTA – is still literally on fire.
But it’s also fair, as some industry figures interviewed did, to wonder why the mayor’s team isn’t offering relief or promising to delay the new, highly strict stretch energy code or higher affordable housing requirements that may not yet be in force when a conversion is permitted.
Is the office conversion program better than doing nothing? Yes. But the simple math says the city will still be saddled with plenty of vacant offices downtown whose eroding value will drag down tax receipts and continue to poison relations between City Hall and parts of the business community. In addition, the more vacant space exists downtown, the harder it’s going to be for the merchants Wu is trying to attract downtown to thrive.
One must hope that something more is coming from this administration, including more detail on how it hopes to prevent blight from developing downtown. As things stand, it’s looking like a bumpy ride ahead for the neighborhood.
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