Office buildings in cities across the nation stand half-full or even completely empty–a lasting legacy of COVID-19. Yet, while commercial space is abundant, housing is in short supply. Experts say America needs 4 - 7 million homes to meet the need. There are many factors responsible for the housing crisis both here in Washington state and across the country, but limited supply is at the heart of the issue.
According to a Goldman Sachs report detailed in Fast Company, the U.S. office vacancy rate is 13.5%, the highest in more than 20 years, and the rate is expected to rise to 18% within the next decade. While employers are figuring out how to embrace remote work, a growing movement is pushing for vacant commercial spaces to be converted into housing, but the process is not without complications. There are a variety of conditions and constraints to consider when balancing the costs, impacts, and benefits of the adaptive reuse of commercial spaces. Some of the challenges of converting commercial buildings into residential apartments include: zoning regulations, undesirable living locations (think office parks far away from schools, grocery stores, etc.), and ultimately the financial feasibility of the project.
Commercial buildings were not built with the intention of being converted into spaces where people would one day live and raise families, so it’s not as easy as reconfiguring the space of a floor and building walls. Most office buildings built between the 1970s and 2000s are tall and square or rectangular to maximize space; with wide distances between inoperable windows, and deep floors for sound proofing, fire protection, plumbing and ventilation systems. To convert these places into housing, commercial buildings need to be scrubbed of environmental contaminants like asbestos and retrofitted so each apartment has windows that open, its own circuit breaker, fire system, plumbing, HVAC and electrical system which is a major undertaking.
In 2022, Moody’s estimated commercial-to-residential conversion to cost between $100 - $200 per square foot, noting these estimates will be higher with inflation. Mahesh Daas, President of Boston Architectural college, told The Hill the costs of converting these buildings into apartments can be upwards of $500 per square foot. As a comparison, in 2023 the cost of new multifamily construction was between $350 - $400 per square foot. However, Gensler, a global design firm, found that it is possible to convert commercial space into residential apartments for up to 30% less than new construction, but the type of building matters.
Gensler studied the design of more than 1300 office buildings throughout North America and found that only 25% of the buildings they assessed were candidates for conversions. Age, location, building size (both floor square footage and number of floors), types of windows, and other design features are all factors that need to be accounted for when assessing which buildings are candidates for conversions. Older buildings, “Class B” and “Class C” buildings, that are in the right locations, have the potential to offer some of the best opportunities for commercial-to-residential conversion because they tend to have smaller floor plates, higher ceilings, windows that open, and brick or stone exposures— an appealing characteristic of an apartment.
In 2023, Manhattan, NY; Richmond, VA; Alameda, CA, Charlotte, NC; and Cincinnati, OH, were the top five cities in the nation with the most converted apartments. It’s estimated that 58,000 apartment conversions are currently in process. An article written by the Urban Institute in June of 2024, finds that Seattle, Phoenix, Atlanta, Denver and the Bay Area are the top five areas that can benefit from commercial-to-residential conversions because of the availability of unused office space and the high housing supply need.
Removing Barriers to Make Commercial-to-Residential Housing Conversions Feasible
The lack of housing supply is the cause of the housing shortage here in Bellingham and across the nation. Because of underbuilding over the last two decades, a 2021 report by Rosen Consulting Group, Housing is Critical Infrastructure: Social and Economic Benefits of Building More Housing, finds that America needs to produce more than 2 million homes per year over the next 10 years to fill the 6.8 million housing needs gap. A number that also accounts for the loss of existing units due to natural disasters and the declining infrastructure of old homes. Addressing land-use regulations and building codes, streamlining the permitting process and providing economic incentives are all tools to stimulate new construction and commercial-to-residential conversions. The report highlights the necessity for all levels of government support, stating:
“Beyond incentives for rezoning at the municipal level, federal tax credits for converting existing underutilized non-residential properties to new housing could prove particularly effective in reducing funding gaps and making conversions possible, thereby helping to narrow the residential underbuilding gap over time.”
From Ohio to Missouri, California, New York, Boston, Virginia and many more, states across the U.S. are revising land-use regulations that have traditionally prevented residential in commercial zones. In our own backyard, Washington passed HB 1042 to reduce zoning restrictions and regulations and encourage building owners and developers to create residential spaces inside of commercial buildings.
The Seattle Times states, “Washington lawmakers are mulling new financial breaks for developers who convert commercial buildings into apartments or condos, an attempt to respond to the state’s glut of empty office buildings and dire need for new homes,” and reports that 14% of offices are vacant in the Puget Sound region.
Just last week, Seattle’s Land Use Committee approved a proposal to create roughly 2,000 additional housing units from vacant commercial spaces. To make it more financially viable for builders, the city will exempt these projects from construction sales tax.
As states pass legislation to loosen zoning restrictions to incentivize more housing production, the federal government is implementing policies to increase supply. In May of 2022, the Biden administration released the Housing Supply Action Plan designed to “ease the burden of housing costs over time, by boosting the supply of quality housing in every community.” Creating new financing mechanisms and improving current federal financing programs, expanding and strengthening the Low-Income Housing Tax Credit, addressing supply chain issues and labor shortages, are just a few of the tools the federal government is providing to encourage more housing supply.
Further, in the fall of 2023, the White House released a Commercial-to-Residential Conversion Guidebook to help property owners find resources and take advantage of below-market loan opportunities, tax credits and other federal programs that can reduce costs of conversions. And, just recently, in July 2024, a bipartisan bill introduced The Revitalizing Downtowns and Mainstreet Act in the House of Representatives which, if passed, could create a federal tax credit for the conversion of older and underused office and commercial buildings. At this time, the bill requires that buildings are at least 20 years old and nonresidential. Conversion costs must exceed $100,000 or 50% of the building’s value. At least 20% of the housing that results from the conversion must be affordable for a 30-year period for those making no more than 80% of the area median income.
With state and federal support to reduce regulatory barriers and economic incentives to make the projects more feasible, it’s now up to municipal governments to reduce regulations and impact fees, improve permitting processes and provide tax credits to encourage building owners and developers to retrofit the right commercial buildings to support housing.
The addition of residential spaces in traditionally commercial areas will change the landscape of cities and attract new amenities to the area to serve renters and homeowners. By revitalizing urban downtowns and creating more housing that is within walking distance of shops, groceries, schools, social spaces, and other services, it strengthens a sense of community and promotes more sustainable lifestyles by reducing residents’ reliance on cars.
To solve the housing crisis, we need more housing. Commercial-to-residential conversions are just one way to create more inventory. Unlike Seattle, Bellingham does not have a large supply of underused office buildings, but there are some commercial spaces that have the potential to be converted for mixed use to support both housing and business development-- if the structural integrity supports the conversion. The fastest way Bellingham can ease rent prices and create more housing affordability is to annex buildable land to increase the supply of the housing types our community wants and needs.
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Housing for Bellingham is a community resource that works to explain the fundamental processes and terminology associated with housing related decisions in an effort to inform the public. When we understand land use planning processes, we can make more informed decisions about housing and land use policies in our community.
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