Downtowns are struggling with twin problems: too much empty office space and not enough housing.<\/p>\n
Well, it turns out that in practice, \u201cadaptive reuse\u201d is complicated. And expensive. Still, many major cities are giving it a try \u2014 but not necessarily at a scale that will make a serious dent in either problem.<\/p>\n
At the start of the pandemic, a lot of office workers began to work from home. More than three years later, it\u2019s become obvious that many are never going back to the office full time. In July, 12% of full-time employees were working remotely and 29% were in hybrid arrangements, according to the most recent survey from the Working From Home Research Project (run jointly by several universities).<\/p>\n
When workers stay home (and as\u00a0tech workers are laid off), companies begin shrinking their office footprint, shedding leases as they come to term. As a result, office vacancies remain high: The U.S. office vacancy rate in July was 17.1%, an increase of 1.8 percentage points since July 2022, according to the most recent National Office Report by CommercialEdge, a commercial real estate software company that tracks office vacancies.<\/p>\n
So while there is unused office space, converting it into housing involves lots of money and lots of red tape. And there may be fewer practical opportunities than you\u2019d think. Steven Paynter, an architect at Gensler, a San Francisco-based architecture firm, created an algorithm to assess the feasibility of conversions and found that only 30% of existing offices in the U.S. and Canada would be structurally viable for conversion.<\/p>\n
Still, many major cities are undergoing office-to-housing conversions \u2014 or are, at least, proposing them \u2014 and they include Atlanta, Chicago, Houston, San Francisco, Seattle and Washington, D.C. In New York City, a developer is transforming a lower Manhattan building that once housed both the New York Daily News and JPMorgan Chase & Co. More<\/strong>: \u20181.5 billion square feet of office space could become obsolete,\u2019 says Boston Consulting Group<\/p>\n This is referring particularly to affordable housing. This was a long-term trend that the pandemic \u2014 particularly early on, with its concurrent spikes in rent prices and unemployment \u2014 only made worse. The National Low Income Housing Coalition says there\u2019s a shortage of 7 million affordable homes for 10.8 million extremely\u00a0low-income families. Meanwhile, the largest group of would-be home buyers are middle-income earners who can only afford 23% of listings on the market, according to a June housing analysis by the National Association of Realtors and Realtor.com.<\/p>\n More housing is the obvious answer to a\u00a0housing shortage\u00a0and for lowering purchase and rental costs \u2014 and also for potentially helping to ease a crisis of urban homelessness. But urban areas, specifically downtowns, have scarce land and an abundance of zoning regulations.<\/p>\n So, can office-to-housing conversions play a material role in solving the housing crisis? And will these conversions bring new energy to depressed downtowns? To gain insights into these big questions, NerdWallet turned to Tracy Hadden Loh, a fellow with The Brookings Institution\u2019s Brookings Metro \u2014 a nonprofit think tank \u2014 and co-author of the paper \u201cMyths about converting offices into housing \u2014 and what can really revitalize downtowns.\u201d<\/p>\n We discussed what\u2019s happening in downtowns, the challenges with office-to-housing conversion, what needs to happen to revitalize city centers, the affordable housing crisis and why suburbs might be the sleeper opportunity to convert office buildings into housing.<\/p>\n The following interview has been edited and condensed for length and clarity.<\/p>\n NerdWallet:\u00a0<\/strong>This isn\u2019t the first time cities have seen office vacancies in downtowns and other areas, too. Can you point to some other instances and explain why this situation is different?<\/p>\n Tracy Hadden Loh:\u00a0<\/strong>When really devastating disruptions happen, it causes these fluctuations in the office market. But in the past, the office worker has recovered. Another really different example of there being a glut in the office market is that in the 1980s, the real estate industry functioned a little bit differently than it does today because of some differences in the U.S. tax code. And during that time period in a bunch of markets, developers built what\u2019s called spec office \u2014 spec being short for speculative. So they just built office buildings even though they didn\u2019t have a tenant who had already told them they were going to move into the building. They were just building it and they were like, \u201cGo do something with it.\u201d<\/p>\n NerdWallet:<\/strong>\u00a0If you build it, they will come.<\/p>\n Tracy Hadden Loh:\u00a0<\/strong>Right. And so I\u2019m sure you can imagine that this caused a huge glut of oversupply in the market because people just built all these office buildings and were just like, \u201cSomething is going to come along,\u201d and something didn\u2019t always come along. And so a lot of this product just kind of sat there. But eventually it was taken up by growth and the market.<\/p>\n It didn\u2019t sit there empty for literally forever; it just took time. Eventually somebody leased it and new construction stopped. Then [governments] made changes to the tax code to stop the speculative building.<\/p>\n What\u2019s different about today, as opposed to those other situations that I mentioned, is that it\u2019s happening at a time when there is this structural shift in demand for office space because of the flexibility of remote work. There\u2019s been this big drop in the number of square feet per worker that office employers are using now. And then there are higher interest rates, as well. Those are an unprecedented combination of factors that we haven\u2019t seen in the office market happening at the same time.<\/p>\n More:<\/strong> America\u2019s cities have a \u2018once-in-a-generation\u2019 opportunity to convert office space to apartments \u2014 now comes the hard part<\/p>\n NerdWallet:\u00a0<\/strong>Does it seem like office building owners are trying to wait out office vacancies at this point, or are they looking around and saying \u201cWhat else can we do?\u201d<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:\u00a0<\/strong>It depends on the owner; some are more anxious than others. Some of them are richer than others and can afford to wait longer. If an office owner is like, \u201cI don\u2019t want to wait out a vacancy, then I\u2019m going to maybe take advantage of some subsidies from the government or tax breaks \u2014 whatever it\u2019s going to be.\u201d But it\u2019s still going to be pretty expensive to convert offices into housing. So you\u2019d have to make it worthwhile to convert.<\/p>\n NerdWallet:<\/strong>\u00a0What does it take to make it pencil out for a developer?<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:\u00a0<\/strong>Everything is expensive: the cost of labor is higher, supply chains are in trouble, materials are more expensive than ever. Everything\u2019s expensive \u2014 even converting your office building into a nicer office building is. Converting it into housing would be expensive. Doing nothing is expensive. It\u2019s just kind of a tough situation right now; we\u2019re in a high-cost environment.<\/p>\n The issue with the office-to-housing conversation is that people are kind of pushing a whole bunch of problems together at once, which won\u2019t necessarily yield a rational solution that matches the problems.<\/p>\n <\/p>\n NerdWallet:\u00a0<\/strong>The report unpacks a lot of myths about housing conversion and in downtown areas especially. One of the myths is that downtowns have too many offices when in reality it\u2019s that downtowns have too little of everything else. Can you explain what everything else is?<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:\u00a0<\/strong>It\u2019s absolutely housing \u2014 just to be clear. But it\u2019s also restaurants, clubs, venues, entertainment venues, sports facilities, schools, hospitals.<\/p>\n NerdWallet:<\/strong>\u00a0Like all the other amenities as well. That kind of makes up a neighborhood?<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:<\/strong>\u00a0I mean, I wouldn\u2019t even describe those as amenities. What do people do all day? It\u2019s a lot more than just work and sleep, right? Work and sleep means offices and housing. But what about everything else? The trend, globally, is that productivity is going up. People have more time and more money to spend doing things that aren\u2019t working or being at home.<\/p>\n I think sometimes it\u2019s easy for people to just say there\u2019s nobody downtown. It\u2019s like a ghost town and they\u2019re not necessarily thinking about the other businesses and things that were supported by community workers, for example, as well as the city transit systems and how vacancies are impacting those things as well.<\/p>\n NerdWallet:<\/strong>\u00a0If you start bringing in either new housing or converting housing, is the logical next theory here that it will bring the entertainment centers, it will bring the venues, it\u2019ll bring the hospitals and schools and other things like that to an area \u2014 a different kind of \u201cif you build it, they will come\u201d scenario?<\/p>\n Read<\/strong>: Converting massive amounts of offices to apartments is a \u2018pipe-dream,\u2019 expert warns<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:\u00a0<\/strong>I do think that adding housing in and around downtowns makes sense. Residential is actually a pretty low density land use compared to other land uses like office or retail or entertainment. Land in this central, highly accessible area is very scarce and that\u2019s why all this stuff is in these locations, right?<\/p>\n But generally speaking, downtown is all about proximity and accessibility. And so making sure that there\u2019s a really good supply of housing near all the stuff absolutely makes sense. But the housing is not a substitute for the stuff.<\/p>\n NerdWallet:<\/strong>\u00a0Let\u2019s talk about affordability. Usually when you build more housing, rents will go down, right?<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:\u00a0<\/strong>That is how it works.<\/p>\n NerdWallet:<\/strong>\u00a0But creating new housing in downtown areas and bringing in all these other new things, new businesses, etc., it seems like it could draw young professionals with disposable incomes away from other areas of cities and potentially alleviate some of the rent pressure in the areas they left. Is that kind of a hypothesis accurate or is it like not quite there?<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:\u00a0<\/strong>Yeah, it makes sense and that\u2019s what happened the last time that cities built a bunch of new housing in and around their downtowns. But it also depends on what you build, right? Like you mostly build stuff that\u2019s for rent that is actually going to attract and serve a different segment of the population. If you build stuff that\u2019s for sale and you build smaller units then that also serves a different segment of the population.<\/p>\n Plus<\/strong>: Mortgage rates could hit 8%, economists say, citing a worrying sign not seen since the Great Recession<\/p>\n NerdWallet:\u00a0<\/strong>I know some cities also require a percentage of new housing to be affordable housing with below market rents. But a small percentage of new housing while adding much more potentially expensive housing in downtowns seems like a drop in the bucket in terms of meeting affordable housing needs. Can you speak to the myth of office-to-residential conversion as the key to solving the housing crisis?<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:\u00a0<\/strong>The housing crisis at its core is caused by not having enough housing where all the jobs are and there\u2019s no way to subsidize our way out of that or get somebody else to pay for the solution. We just need more housing near where jobs are and that\u2019s it. So office-to-housing conversion can provide us some small percentage of that, like maybe 10%. But we need to also build the other 90%.<\/p>\n We got into this situation by not building enough housing for literally decades in the places where there was a lot of job growth. The only way out is to build a lot of housing \u2014 like decades\u2019 worth.<\/p>\n We\u2019re certainly not going to get out of it by using public money to create some tiny number of artificially cheap housing units some very lucky people will get to live in \u2014 because what about everybody else?<\/p>\n NerdWallet:\u00a0<\/strong>That\u2019s why those lottery systems are pretty frustrating \u2014 all it is showing you is that there just isn\u2019t enough housing.<\/p>\n In cities that are supporting office-to-housing conversions, are those cities going to be easing, permitting or regulatory provisions that would allow for the creation of weirder apartments \u2014 I mean those that aren\u2019t 100% fitting code like having windows in bedrooms? I just hear people saying, \u201cWhy can\u2019t they just turn all of these empty offices into housing?\u201d And all I can think is of the plumbing alone. Housing and commercial spaces are just very different.<\/p>\n <\/p>\n Tracy<\/strong>\u00a0Hadden Loh:<\/strong>\u00a0If we made it easier to build housing, people would build more of it and then more people would have places to live. It is kind of a no-brainer. And yet we don\u2019t do it because we have this incumbent bias where we\u2019re like, \u201cWell, I have somewhere to live.\u201d And so new housing would be \u201cfor other people.\u201d<\/p>\n NerdWallet:<\/strong>\u00a0Seems like it comes down to a space issue, too, right? It\u2019s always easier to say let\u2019s build up, except there are areas with limits to how high you can build, for example.<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:\u00a0<\/strong>In the most accessible and highly desirable areas, location is scarce. Yes, that\u2019s one of the reasons why building housing there is expensive.<\/p>\n NerdWallet:\u00a0<\/strong>So empty offices are sitting on pretty expensive land. Would it just be easier, with the challenges to convert to housing, to knock down a building and restart with the intent for it to be residential? Or is that impractical?<\/p>\n Tracy<\/strong>\u00a0Hadden\u00a0Loh:\u00a0<\/strong>You have to keep in mind \u2014 especially with the cost of materials right now \u2014 that even when you do the demo, all you can salvage is the steel and the concrete slab. Steel and concrete slabs are expensive. So it would have to be just like a very, very particular kind of a building for demolition to be worth it to save any money.<\/p>\n But there are a lot of low-rise offices in suburban locations that are highly accessible. These suburbs are desirable places to live. That\u2019s the real office-to-housing conversion opportunity.<\/p>\n Those will be many orders of magnitude bigger than the downtown conversion opportunity. And it will be primarily driven by demo. The offices will just be torn down and then much taller apartments will take their place.<\/p>\n NerdWallet:<\/strong>\u00a0And they\u2019re usually near those desirable areas that are also near some kind of public transportation.<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:<\/strong>\u00a0Yeah, because that\u2019s where the jobs were.<\/p>\n NerdWallet:<\/strong>\u00a0What would actually need to happen to alleviate unaffordability in urban centers that lock out middle-income and lower-income populations?<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:<\/strong>\u00a0There are two things that are going on right now at the same time. One is we\u2019ve got to build housing near where our jobs are in order to address demand. And we need to build lots and lots and lots of it. And there are some metro areas that are doing this, like Austin, Miami, Dallas and Houston. I\u2019m not saying they couldn\u2019t be doing even better, but they\u2019re building a lot in sunbelt metros. They have a lot of jobs, their economies are growing and their housing is also growing, so they\u2019re remaining affordable.<\/p>\n The other thing is that jobs can relocate. People can leave high-cost areas where there\u2019s nowhere for their workers to live. Right. And they can go somewhere else. The rise of remote work increases mobility.<\/p>\n NerdWallet:\u00a0<\/strong>And we\u2019ve seen some of that already.<\/p>\n Tracy<\/strong>\u00a0Hadden Loh:<\/strong>\u00a0Yes, this is not a hypothetical.<\/p>\n Also read: <\/strong>Want to rent in Manhattan? You\u2019ll have to spend nearly $70,000 a year.<\/p>\n NerdWallet:\u00a0<\/strong>We saw an acceleration of that movement as well \u2014 the rise of remote work during the pandemic is why a lot of our offices are vacant in downtown areas. But also companies are probably wondering, \u201cWhy am I going to be leasing this when my workers aren\u2019t even living here?\u201d<\/p>\n
\n JPM,
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\n into 1,300 apartments. This helps problem No. 2, but perhaps not in a significant way.<\/p>\nProblem No. 2: not enough housing<\/strong><\/h2>\n