DC has around 14.1 million square feet of vacant office space, and 8.2 million square feet of it is in the downtown area. That’s equivalent to more than two Pentagons worth of empty offices.
The DC Council will soon consider a bill that would incentivize owners to convert a portion of that empty office space into much-needed homes.
A glut of empty office space in a region starving for housing
Since the Great Recession, the District’s office market has experienced vacancy rates above 11 percent, and the total area of vacant office space has reached over 14 million square feet. As recently as last month, the office vacancy rate in the DowntownDC and Golden Triangle Business Improvement Districts was 10.3 percent and the total vacant office space was 8.2 million square feet–almost double the vacant space at the end of 2006.
This abundance of vacant space is unlikely to decline. There are more than 5 million square feet of office space under construction, meaning that older office buildings will likely continue to be passed up by business renters.
What is more, the private sector and the federal government simply don’t need the same amount of space they once did. (There is a lot less physical file storage and rooms full of secretaries these days.) Even if an business or agency did need the space, there is plenty of cheaper competition in Virginia and Maryland. Northern Virginia has 32.6 million square feet of vacant office space, and suburban Maryland has 12.4 million square feet.
On the flip side, there are very few homes for rent or purchase in the downtown area, something particularly frustrating given the dramatic shortage of homes and affordable homes the DC region is facing.
A proposed bill aims to incentivize the residential conversion of downtown office space
In July, Councilmember Jack Evans proposed legislation that would set aside city money for tax abatements ($5 million per year for 10 years) to incentivize owners to convert their empty vacant office space into homes.
The Office of the Deputy Mayor for Planning and Economic Development (DMPED) would administer these tax abatements and negotiate on behalf of the city to incentivize the conversion of 200,000-400,000 square feet of now-empty office space, which could produce an estimated 300-400 new homes per year.
Projects would be subject to inclusionary zoning, which means that eight percent of the new homes would be made affordable to those making 60 percent of Area Median Income (meaning the rent for a 1 bedroom apartment would be capped at $1,240). Of the $5 million set aside per year, $1 million per year would be used to support this affordable housing.
Why aren’t office building owners already converting to residential?
There are technical difficulties that are both expensive and onerous when you want to convert what used to be office building into a residential one. Some have to do with the construction of the actual building (such as different floor plates, etc) and others have to do with different building codes and requirements.
None of these DC-area conversions have used any public incentives offered by local governments. Rather they've happened because the developer sees an opportunity to buy a building for relatively cheaper rates because of the oversupply of office space, and can still profit after the costly redevelopment.
Building owners argue that while it is profitable to make those conversions in some areas, in downtown DC where owners demand hefty rents for prime office real estate the margins aren’t worth the conversion. This bill would fill in a portion of that gap.
On the other hand, some could argue that if a conversion isn't financially viable, market forces ought to eventually take care of it rather than public subsidy. Owners could choose between selling for less or leaving the building vacant and foregoing potential rent. However, DC would lose out on potential tax revenue in the meantime.
Other cities have tried similar incentive programs. Baltimore instituted a tax abatement incentive program in 2013 to incentivize market-rate housing downtown, and New York City has a tax abatement program to produce rent-stabilized apartments.
This is also not the only bill in DC looking to transform a portion of our abundant empty office space. Another bill, proposed earlier this year by Councilmember Robert White, would establish a task force to explore the possibility of producing subsidized affordable housing in office-residential conversions.
Why not just tax the vacant properties higher?
Some offer an alternative idea to what is presented in this bill: why not just disincentivize property owners from continuing to hold onto their vacant office properties?
Right now some building owners are able to rent out just enough of their office building to maintain it while waiting for the market to turn. I would argue this is not likely, due to the regional glut and that fact that business aren’t interested in older models of office space anymore.
One way to disincentivize this behavior would be increasing the property taxes on vacant office space. DC has a vacant property tax that is applied separately to residential and office space, and it is significantly higher than what is applied to occupied homes and commercial spaces.
One issue with the strategy would be its implementation: if an office building is 10 percent rented out, do you charge a different tax rate on the 90 percent vacant part? Despite the administrative challenges of applying such an idea, would that be enough to be incentivize a better use of the space?
In the decade prior to 2008, Los Angeles took a different strategy and instead implemented an Adaptive Reuse Ordinance for downtown office-residential conversions that exempted these projects from certain zoning rules, in particular parking minimums. This policy helped to produce over 7,300 new homes downtown over the decade.
Proponents of Evans’ legislation argue that this tax abatement strategy is worthwhile. Beyond creating a more vibrant, mixed-use downtown, supporters say converting these properties into homes would bring more revenue to the city, estimating anywhere from $2 million to more than $5 million per year in net new property, income, and sales taxes. They argue that the alternative (400,000 square feet of office space that remains vacant) would only generate approximately $2-3 million per year in property taxes.
On October 20 the Committee on Finance and Revenue will hold a hearing on this legislation. What do you think? What’s the best way to get more homes and affordable homes out of what is an obvious overabundance of office space?