Office to residential conversions gain traction in Boston – Marketplace

When Los Angeles-based CIM Group bought a six-story office building in Boston, the plan was to renovate, according to Rich Kershaw, vice president of development at the firm.

“We were going to upgrade the elevators, upgrade the bathrooms, redo the lobbies and the facade and hopefully increase the rent,” Kershaw said.

This building was an industrial warehouse before becoming office space. It’s a stately, old structure — almost the antithesis of the glass towers going up in other parts of the city. That’s because demand for the most modern work spaces in Boston is as healthy as ever.

One in 5 office spaces in the United States are empty. According to Moody’s, that’s the highest vacancy rate in history.

Now some developers in major cities want to turn that unused office space into housing. But it could take big subsidies to make it happen. That’s why Boston is offering building owners a 75% property tax break for the retrofits.

Standing in the empty building, next to huge glass panes overlooking the city’s South End district, Kershaw said they did do the upgrades. But then the pandemic hit. Working from home became the norm for many urban workers — and he could lease out only one of six floors.

“I don’t see the office being a viable use for the near future,” he said. “So I think the residential is perfect.”

This office building is one of 13 in Boston whose owners are exploring “resi conversions.” The city says this can do two things: ward off the threat of office vacancies while adding apartments in one of the country’s most expensive housing markets.

Helping lead the effort to explore resi conversions across Massachusetts is Tim Love, founder of Utile Architecture and Planning in Boston.

“Your downtown will be more successful if you’ve got more people living over the commercial space on the ground floors,” he said. “That is going to make your downtown more lively and less a place that goes completely quiet after 5 o’clock.”

This also helps preserve old buildings, but only a slice of them are viable for converting. One study suggests that 15% of office buildings in the country’s largest cities are physically suitable.

Among the other challenges for developers are high interest rates, the cost of labor and materials and the need to overhaul mechanical systems. Not to mention that housing often commands lower rents than office space.

That’s why the state is offering owners up to $4 million for resi conversions. Developer Rich Kershaw said these subsidies are key.

“It’s gotten us all here to talk about this and starting looking at it seriously,” he said.

Developers also face Boston’s affordability requirement: 20% of new housing must be set aside for people with lower incomes.

Other cities are moving ahead on similar projects. Chicago is in the middle of a massive conversion involving 10 city blocks. The city was able to set aside more than $150 million in subsidies to convert four commercial buildings into apartments: 3 of every 10 units will be considered affordable.

And New York City is looking to rezone to make it easier to do conversions in more neighborhoods.

Valerie Campbell is a land use attorney in New York. “Our clients have a lot of interest — particularly if these current zoning initiatives become effective, we’re going to see a lot more office conversions,” she said.

Campbell added that most New York resi conversions have happened in pre-World War II buildings. But now developers are considering newer structures that are more difficult to convert, with huge floor plates and windows that don’t open.

In Boston, conversions aren’t likely to fix the commercial real estate market or solve the city’s housing crisis. The city says it needs 69,000 new units in the coming years.

But conversion proponents say doing even one building can make a big difference, starting on its own block.