Close-up of the upper-story facades of two office buildings in Boston's Bulfinch Triangle, where a number of class B and C office buildings have lost their tenants.

A steadily increasing number of Downtown Boston’s class B office buildings are being proposed for conversion to apartments. But only two have been financed so far. iStock photo

The city of Boston has extended its office-to-residential conversion program but only two projects have been financed with only a year left before the application window closes.

Mayor Michelle Wu and announced the extension of the tax break program in June of last year at an event which also saw Gov. Maura Healey offer $15 million in additional subsidies to incentivize these projects. The state funding would fund up to $215,000 per affordable unit in the development with a cap of $4 million per project to help compensate for a city requirement that 20 percent of units in a conversion be affordable housing.

According to the City of Boston Planning Department, Boston has received 14 applications to convert 18 buildings, creating 690 units of housing including 139 income-restricted units. This equates to a total of 620,000 square feet of office space being converted, out of the 12.97 million square feet of office space that research by brokerage Colliers said was vacant as of the third quarter of last year.

Of those 14 applications, five conversion projects have already received Article 80 approval to move forward with renovations, which amount to nearly 200,000 square feet of office space slated for conversion into 236 units.

Projects must have applications filed with city officials by Dec. 31 of this year and begin construction by Dec. 31, 2026.

Office conversions in general have historically not been in demand but with vacancy rates remaining high post-pandemic. Even when conversions were created, office buildings would be converted to industrial buildings instead of housing.

“It hasn’t been widespread until more recently,” Elizabeth Berthelette, head of Northeast Research & National Life Science Research at Newmark stated. “Office fundamentals are obviously challenged at the moment and Boston’s a difficult market to build in. It’s very expensive, it’s very dense, all of those things. The lack of new housing over the last several years, I think, is kind of all working towards driving this trend.”

Financing Woes

But so far only two projects have received financing: 263 Summer St. and 281 Franklin St. These projects have been financed by two local banks, North Shore Bank and Rockland Trust, respectively.

North Shore Bank credited the program for making the project economically possible for what Geoffrey Leahy, a vice president and commercial loan officer at the bank, called a “unique project.”

“263 Summer St. is a unique project with strong metrics being performed by a seasoned local developer which will convert a well-known, but currently underutilized, historic property into needed housing,” Leahy said.

While these projects are unique and financially feasible enough to receive funding, other projects have yet to reach that step. Even though interest might appear to be lacking, Matthew Osborne, executive vice president and chief credit officer at Eastern Bank believes that banks are interested in financing these types of conversions.

“Multifamily housing, whether it’s the conversion of office buildings into multifamily or just financing traditional multifamily, is probably one of the lower-risk commercial real estate asset classes that exists,” he said.

Osborne added that with the demand in the Massachusetts housing market, multifamily is the “favorite asset class.”

Interest Rates Play a Part

The biggest factor by far is the cost of debt, experts say. Just like new construction – where groundbreakings have come to a near-standstill – even Boston’s high rents aren’t enough to help a developer afford today’s construction loans.

“The debt markets have been heavily impacted by [the] interest rate environment,” Berthelette said. “That’s probably far more important to the financing discussion than sort of any individual project.”

According to Jeff Myers, Boston research director at Colliers, state and local leaders could provide more benefits to help projects advance or get new ones to enter the pipeline. Helping with site preparation costs or adding density bonuses for affordable housing are some solutions could help more projects receive financing, he said.

Still Myers also believes that interest rates and high construction costs play a major factor in projects remaining without financing. Banks also have to deal with stricter commercial real estate lending standards compared to recent history, and some are actively looking to do less lending in the sector.

Sam Minton

“Construction costs now are higher than they were a few years ago, and the bank lending standards for commercial real estate, generally speaking, are more stringent now than there were a couple of years ago as well. So, you’re still going to have to potentially cobble together financing from different institutions in order to get a project fully off of the ground,” he said.

There is also the issue of dealing with current tenants. The fact that an office isn’t fully vacant means that revenue is being generated that can increase the cost of the building before its sale for a conversion. Even if a landlord seeks to convert a building they already own, tenants might need to be relocated which adds even more costs to the project.

Even with all these challenges, developers still have nearly two years to find banks or other lenders that see profit in financing their project.

“I think these projects still have time. Even though the permitting process is easier – it’s supposed to be a truncated timeline – these still are commercial developments that take time,” Berthelette said.

But it’s becoming an open question whether financing conditions will improve in 2025.

In their most recent meeting, Federal Reserve policymakers agreed that while progress has been made in lowering inflation, levels are still elevated and threaten to increase again. In response, according to interest rate-setting committee minutes released last week, the central bank will likely slow the rate-cutting campaign it launched in September amid fears inflation could reignite.

Only Two Boston Office Conversions Have Financing So Far. Why?

by Sam Minton time to read: 4 min
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