As Boston’s office market took another step back this spring, Mayor Michelle Wu indicated the administration is taking a harder look at public subsidies to support housing conversions. Photo by James Sanna | Banker & Tradesman Staff

Public subsidies could be the next tool in Boston’s bid to revive the downtown economy through conversions of neglected offices into housing. 

At the end of the first quarter, Boston’s central business district had nearly 17 million square feet of available office space, according to a CBRE report, or the equivalent of 14 Prudential Towers. The big ramp-up in vacancies and sublease listings since the pandemic has prompted a rethinking of downtown’s future, as the shift to hybrid work appears likely to depress office demand for the long term. 

In an interview with Banker & Tradesman, Boston Mayor Michelle Wu said the administration is in talks with several office landlords about city subsidies to help pay for residential conversions. 

“We want to identify what the financing would even look like and what’s necessary,” Wu said. “We’re eager to think about what roles the city and state could apply, whether it’s permitting and zoning streamlining, or financial incentives and tax incentives.” 

The potential pilot program is taking shape as the administration awaits the findings of a $100,000 study by HR&A Advisors this summer on the office-to-residential incentive strategies. 

The loss of office occupancy has implications for other elements of a healthy downtown economy, from tourism to retailers and restaurants. The scarcity of office workers, particularly on Mondays and Fridays when many companies don’t require in-office work, draws attention to social problems, Downtown Boston Business Improvement District President Michael Nichols said. 

“With reduced foot traffic comes perceptions of a lack of safety, or perceptions of a lack of employment,” Nichols said at a Downtown Boston Residents’ Association meeting last week. “I don’t think we’ll ever have a day where we have five-day-a-week office worker foot traffic. Are we willing to continue to chase that? Or think about incentivizing tourism or residential conversions?” 

Foot traffic, as measured by Downtown BID sidewalk cameras, is registering modest gains in 2023. During the week of May 21-27, for example, total pedestrian activity increased nearly 14 percent from 2022 to 736,579. 

Zoning Incentives Might Not Be Enough 

Boston is already considering revamping its zoning in the downtown area, including a potential increase in base building heights from 155 to 400 feet in parts of Downtown Crossing. 

But architects and commercial real estate executives say the cost of construction and other complications make residential conversions difficult in many cases. 

Owners of low-occupied office buildings would need to wait for remaining tenant expirations or buy out leases before launching residential conversions, noted Michael Scott, co-managing partner of Boston law firm Nutter. 

“It’s not going to be easy to make the math work,” Scott said. “What is the cost of conversion, and is it less than building new? How much debt is on the building, and how do you account for the costs to buy out some of the tenants?” 

Approximately 20 office landlords met with architects Gensler during the month of April to discuss the feasibility of residential conversions, Gensler Co-Managing Director Jared Krieger said in a recent interview. 

“It comes down to the dollar-and-cents equation,” Krieger said. “The cities that have incentives are where it’s happening.” 

Wu said the pilot program will focus on class B and C office properties with suitable physical characteristics. 

As Boston’s office market took another step back this spring, Mayor Michelle Wu indicated the administration is taking a harder look at public subsidies to support housing conversions. iStock illustration

“Even there, some of the values would likely have to drop even more to see where the financing would land,” Wu said. “We’re hoping to see if there’s a special case here or there where we can make this happen.” 

The Financial District and Downtown Crossing neighborhoods comprise approximately half of the city’s office stock, and have availability rates of 25 and 22 percent respectively according to CBRE. Downtown Crossing, in particular, contains older buildings with smaller footprints and floor plates that could be suitable for conversion into apartments or condominiums. 

Calgary Gives Cash for Conversions 

One frequently-cited example of a successful public policy is the city of Calgary, where efforts to fill vacant offices with housing predate the pandemic. 

Downtown Calgary office vacancies hit 34 percent, equal to 14 million square feet of vacant space, in 2015 after a recession that devastated the city’s oil and gas industry, said Natalie Marchut, Calgary’s manager of development and strategy. Downtown property values declined by $17 billion. 

The city also approved fast-track permitting for change-of-use-conversions, replacing a process that usually takes up to 8 months, Marchut said. 

The program budgeted a total of $153 million and has paid for 10 conversion projects thus far. This spring, the Calgary City Council approved a new program incentivizing the demolition of obsolete office buildings, starting with a $3 million budget. 

“For a building at the end of its life with no useful future, the best thing is for it to come down and hopefully become residential or mixed-use or even the land for a park,” Marchut said. 

Philadelphia has offered 10-year tax abatements for residential conversions, which helped create more than 1,800 new apartments in former commercial spaces since 2020. 

Tamara Small, CEO of the commercial developers’ group NAIOP Massachusetts, said the local real estate industry is “eagerly awaiting” the findings of the HR&A Advisors report and “strongly believes that government incentives are necessary. Small cited additional potential costs to developers in Boston from proposed new policies such as requiring commercial buildings to reduce carbon emissions, which typically require utility system retrofits. 

Report Urges Cities to Hit Pause 

While Boston and other cities weigh next steps, a Washington, D.C. think tank has offered a contrarian position. 

In a recent policy report, the Brookings Institution said many of the assumptions driving the debate over office-to-housing conversions are flawed. 

Steve Adams

Downtown office economies were declared non-viable in New York after 9-11 but recovered, the report stated. And as a real estate use, office properties contribute more to downtown economies than residential uses, it argues. A well-occupied office building typically houses twice the number of people as a multifamily use, and delivers more ancillary benefits to neighborhoods such as retail activity. 

Cities with thriving downtown commercial districts tend to have more higher-priced housing as well, said Tracy Hadden Loh, a Brookings Institution fellow and co-author of the report. 

And residential properties are taxed at a lower rate than commercial in many cities including Boston, Low noted, minimizing the fiscal benefits of conversions. For fiscal 2023, Boston’s commercial property tax rate of $24.68 per $1,000 of value is more than twice the residential rate. 

“For now, the challenge around low office utilization is more of a placemaking challenge than a fiscal challenge,” Loh said.