The office vacancy rate in Boston’s central business district hit 20.2 percent at the mid–year mark, according to CBRE data. iStock photo

A growing sense of urgency swirls around Boston’s 11 million square feet of vacant office space, spurring policy debates about the need for new public incentives and the growing burdens on landlords and business growth.

The city’s downtown office to residential conversion program – designed to remove out–of–favor office inventory while generating needed housing production – has attracted a modest response from developers since its launch in October. Now, the real estate industry is turning to potential state and federal programs that would fill the financing gaps hindering projects.

“There needs to be some additional dollars from a capital stack perspective to thread the needle,” said Albert Rex, a principal at tax consultants Ryan in Boston. “It just reinforces this is not a Boston problem or a New York problem. It is an every-city problem at this point.”

Brokerage research shows no signs of an office leasing recovery, and a recent pause in tenant upgrades to higher–end properties.

The city of Boston’s office vacancy rate hit 17.7 percent at the mid-year mark, according to CBRE, representing over 11 million square feet of building space lacking rent-paying tenants.

Even the silver linings in the market data are clouded by cautionary caveats. Sublease listings fell for the third straight quarter, according to CBRE, now representing 24 percent of all available office space in Boston. Part of the reason is expiring leases, adding to direct vacancies and their financial burdens on landlords.

WeWork’s bankruptcy and rejection of leases at four large Boston locations contributed to a 1.5 percent increase in the central business district vacancy rate, to 20.2 percent.

‘Not Many’ Able to Make Conversions Work

Since launching in January, the city’s downtown office to residential conversion program has received nine applications for a total of 489 housing units in Downtown Crossing, the Financial District, South End and Fort Point.

Projects submitted under the program total 456,000 square feet, or approximately 4 percent of the vacant office space in Boston.

To spur more conversions, the Wu administration extended the deadline for applications last month through December 2025. And Beacon Hill stepped in with additional financial incentives.

Gov. Maura Healey announced the state awarded $15 million from its Affordable Housing Trust Fund to subsidize income-restricted housing conversions in Boston. At $215,000 per unit, the program could help pay for approximately 70 affordable units. That could support developments that total around 400 units of housing based on the Boston incentive program’s affordability requirements.

Healey is seeking legislative approval for another $275 million for office-to-housing conversions statewide in the proposed Affordable Homes Act bonding bill.

Projects submitted under the downtown office to residential conversion program total 456,000 square feet, or approximately 4 percent of the vacant office space in Boston. iStock photo

Boston’s existing program offers a 75 percent abatement on property taxes for 29 years. But even many owners of office buildings that are physically suitable for residential conversions appear to be struggling to make the financial equation work, said Megan Watts, a real estate attorney for Goulston & Storrs in Boston.

“It’s expensive to do a lot of these conversions, particularly for a lot of the office stock that’s older,” Watts said, noting that conversions are required to comply with the stretch energy code which calls for tightly-insulated Passive House building envelopes. “My sense is it’s a tough economic package. With the tax incentives you get in exchange, not many are going to be able to make it work.”

Proposed federal legislation that offers tax credits for office-to-housing conversions could make it easier for developers to complete financing packages upfront.

A recent amendment to the Revitalizing Downtowns and Main Streets Act would offer $15 billion nationally for conversion projects at buildings that are at least 20 years old.

The program is similar to the low-income tax credit and historic tax credit programs that many developers rely on to complete financing for affordable housing projects, such as mill conversions in Gateway Cities.

Developers could tap into both historic tax credits at qualifying office buildings along with the new housing conversion tax credit if it’s approved, noted Rex, the historic tax credits principal at Ryan.

Tax Shift Would Add Expenses

The future financial prospects for office landlords also are tied to a proposed shift in Boston’s split rate property tax structure, which is currently under review by the state Legislature’s Joint Committee on Revenue.

On Tuesday, Mayor Michelle Wu made her case directly to lawmakers that the five-year increase in the commercial sector’s share of the overall tax base would buffer a steep increase in residential taxes without burdening the commercial sector.

“Our proposal would give the city the tools we need to protect the residential taxpayers and give them the tools to stay in their homes,” Wu said at the State House hearing.

Steve Adams

Because commercial assessments are dropping because of declining occupancy, a larger portion of the tax levy is expected to shift to the residential sector. The tax rate would remain unchanged until January, when residential taxes would rise 33 percent for the second half of the year.

The Wu proposal would create a temporary exemption in the maximum differential between commercial and residential tax rates allowed under state law. If approved, the commercial tax rates would increase 17.4 percent to $29.66, while the residential tax rate would decline 7.8 percent to $10.05, consultants Ryan estimate.

But legislators appeared skeptical of the financial burden on Boston residential taxpayers relative to surrounding communities.

Committee Vice Chair David Linsky, a Democrat who represents the 5th Middlesex District including Natick, Sherborn and Millis, said he typically defers to local communities that submit home rule petitions. But citing administration data that the average annual Boston tax bill is $5,552, Linsky questioned the hardship on homeowners.

“The average single–family tax bill in my district is probably three times what we are discussing,” Linsky said.