A year later, New York is definitely not dead, but some of the other questions remain unanswered. Business travel was beginning to pick up when the delta variant triggered a wave of industry event cancellations. And there is broad consensus that some variation of remote work is likely to stay here too, if not every day of every week.
Add to that backdrop a housing affordability crisis, and interest in converting vacant offices to residential use seems natural. A bill introduced in Congress in July, the Slum Revitalization Act, shows the appeal of that idea.
The legislation, by Senators Debbie Stabenow and Gary Peters with fellow Michigan Representative Dan Kildee, would create a new 20% tax credit per year to help cover about a fifth of costs converting office buildings into residential, commercial, or mixed-use properties. Residential conversions would be required to incorporate affordable housing.
“As our workplaces change due to the COVID-19 crisis, we will see more unused buildings in our centers. Converting these buildings to residential and mixed-use properties will benefit families and our cities, ”Stabenow said in a statement.
“It’s a really interesting idea and certainly worth pursuing,” said Buzz Roberts, president of the National Association of Affordable Home Lenders. “There is clearly a great need for affordable rentals, but there are resources for that. The question is, are those tools viable or do we need more? “
Some of those existing tools include the Low Income Home Tax Credit, which Profiled MarketWatch in 2017, and that Senator Ron Wyden, an Oregon Democrat who chairs the Senate Finance Committee, has recently proposed to expand.
There have also been some local responses to the pandemic era, such as that of New York State. “Housing with Dignity for Our Neighbors Act” which was approved by the legislature in 2021 but was not signed by Governor Andrew Cuomo.
Commercial real estate expectations told MarketWatch that the national tax credit for conversions could be helpful.
“I think this makes sense,” said Rob Goldstein, portfolio manager at CenterSquare Investment Management. “The conversion of offices into residential has been done, but it is difficult. You need the right kind of office, and even then, financially, it may not make sense, but if there are projects on the edge, something like this could push you to the limit. There is too much old office space, which will end up as B-malls in a few years. “
Getting a feel for the housing affordability crisis is straightforward. The national median income increased 8.1% in the 12 months to June, according to Realtor.com data. (Realtor.com is owned by News Corp, parent of Dow Jones, publisher of MarketWatch.) That is much faster than the growth of wages, when people are employed. As New York State law notes, “Homelessness in New York City reached a record 20,000 people in shelters as of October 2020.”
What’s a bit more difficult to quantify is what a new tax credit could mean for empty or underused retail space in various metropolitan areas. In emailed comments, a spokesperson for commercial real estate firm CBRE told MarketWatch that the city with the most vacant space is Dallas-Fort Worth, at about 25%, but that’s close to its historical average at long-term, while New York City’s vacancy rate is roughly half, but high compared to its historical norm.
In Lansing, Michigan, meanwhile, sheer vacancy was never an issue until COVID hit, but the tax credit could still make a big difference. The city, home to the state capital of Michigan, has seen the use of its office buildings plummet during the pandemic and sees an opportunity to make the most of the crisis.
“We depend on thousands of people to be downtown,” Mayor Andy Shor said in an interview. Only now, he said, are some state workers beginning to return, but only a few days a week, for most of them.
“It would be a great benefit to be able to convert the space into housing because people would live in the center of the city during the nights and on weekends, it would not be just the state employees who are there only during the day.”
A broad switch between offices and residences could be transformative, Shor said, sparking a small business services sector that is open all the time.
“We don’t have the same affordable housing problems that other communities have, but we would like to have it in the center,” he said. “Especially for people who work for the government who just finished college. There needs to be more options. “
That’s key to any affordable housing strategy, Roberts noted. “You could say, in fact, this is both a neighborhood stabilization strategy and an affordable housing strategy because of all the side effects of vacant and underutilized properties in the surrounding area.”