With the critical shortage of housing, it might seem to make sense to convert empty office buildings into condos or apartments. But it’s not that simple. From the regulatory and zoning hurdles to the high costs of retrofitting existing structures, in many cases the price of conversion would be far greater than building new housing. The idea is being considered elsewhere in the country, including in California, where lawmakers put $400 million toward grants for developers to offset conversion costs. Willamette Week reporter Sophie Peel has been covering this story and joins us to tell us more.
The following transcript was created by a computer and edited by a volunteer:
Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. With the critical shortage of housing and a ton of unused office space, it seems like a no-brainer to turn some of those offices into condos or apartments. But it’s not that simple. Between regulatory and zoning hurdles, and the high price of retrofits, these conversions can be much more than just starting from scratch. But developers and elected leaders in Oregon are considering this as one response to the housing crisis. Willamette Week reporter Sophie Peel has been covering this story, and she joins us with more. Sophie, welcome back,
Sophie Peel: Thanks for having me.
Miller: Can you give us a sense for the amount of office space in the Portland area that’s not being used right now?
Peel: I think the latest figures we have is that office vacancy is at 26%. Granted, that was three or four months ago that we’ve seen those latest figures, but that’s just an astonishing amount of unused office space. And we know that if you have a glut of anything, whether it’s office space or weed, it’s going to be a renter’s marketplace, and consolidation will occur. There are going to be office buildings that naturally are not going to have the same types of tenants that the swankier office buildings have. So we know that, eventually, consolidation is going to happen, and these smaller, older buildings are going to be the first to go. So we’ve got a whole lot of empty office space and we also are obviously met with a severe housing shortage. And so I think naturally there’s an opportunity there for some conversions.
Miller: Is it your sense from people you’ve talked to that this is still the result of the pandemic, this glut of office space, that could soon be filled up? Or are we looking at a long term situation with unused offices?
Peel: We don’t know entirely yet. But we do have real estate experts who are saying that there is going to be a certain slice of the workforce that simply does not come back to in-person work. So we know we’re not going to regain what we had. Some of that is trickling back. As both private and public companies ask their employees to come back to certain degrees, we are going to see some of that space fill up. But we also think there’s a cap to how much of that vacancy is going to go down.
Miller: I’m reminded actually of news in the last couple of days of a couple of tech companies moving within the city, but moving to places that have that have a fewer number of office spaces, because even if they haven’t necessarily lost people, but not as many of their people are gonna be going in on any given day, that seems to be at least the calculus for some of these companies.
So my understanding is that every building would have its own particular issues and specifics. But what are, broadly, the technical challenges involved in this kind of retrofit?
Peel: There’s a lot of things that make these conversions really difficult, not only logistically, but really financially. Some of them are cost barriers, others are code or regulatory barriers. One of the big things is that, in the seventies, developers started to basically make offices a whole lot more expansive, bigger floor plates, and those are just not suitable for conversion to residential. We also know what cripples a lot of these potential conversions is that older buildings aren’t seismically upgraded. What that means is that, if you convert from an office or a commercial space to residential, that it triggers those seismic upgrades, which are just vastly expensive. A seismic upgrade is basically strengthening the foundation of the building so it doesn’t crumble or collapse in the event of an earthquake.
Another thing is one-time development fees called system development charges, and then property taxes of course. As we very well know, the city’s permitting system is really broken, and we also have really rigorous design review standards. So there’s just so many things standing in the way of these buildings converting.
Miller: How did people you talked to think about the question of relaxing some of these codes without jeopardizing safety?
Peel: It’s a really sticky subject. We are met with two very real things, one that’s a little bit more immediate, and one that we know is eventually going to happen, but it’s sometimes hard to imagine when it’s not happening currently. We are met with this housing shortage, and we need more housing, that’s the bottom line. And the state is setting aggressive standards for how many units they want to build. But the truth of the matter is, if we don’t offer these incentives for developers to build affordable and middle income housing, we’re just not going to get it. And I did talk to some developers who said “we’ve got to change our triggers for these seismic upgrades, or find a way to lower the cost of them” because that’s what’s crippling a lot of these projects. At the same time, we have seismic upgrade triggers for very real reasons. We know the big quake is going to happen at some point, it’s hard to say when, but we know that’s a very real threat, even if it’s not this generation. I think we’re faced with something that is a little nebulous, and something that’s very concrete. And I think some people are saying, well, let’s deal with the crisis that we have now, and we’ll figure the rest out later.
Miller: Even if that means more people, for example, living in unreinforced masonry buildings?
Peel: Yeah. I will say, a couple developers brought up a point to me that there are so many people right now living in unreinforced masonry buildings. If a building isn’t switching its use, we don’t require every single office and commercial building right now to seismically upgrade. So their argument is we already have thousands, if not millions of people who are living in unreinforced buildings. So why can’t we just relax those standards a little bit now to deal with the crisis of now?
Miller: You talked to a developer who took Portland city staff to Salt Lake City to see a commercial to residential project that they’re working on there. What did you hear about this site? It seems like a kind of proof of concept, although not in Portland.
Peel: Heinz is the developer who did that, and they actually purchased this building, I believe in 2017. And basically, the city had deemed this building obsolete, so they got it for dirt cheap, and they wouldn’t have done this conversion if they basically didn’t get this building almost for free. They worked with regulators in Salt Lake City, and there are different regulatory and code requirements in Salt Lake City than there are in Portland, and arguably Portland’s standards are a lot higher and a little bit more rigorous. But what I do know is that Salt Lake City was malleable. And I think this speaks to, if any of these conversions are going to happen, it is going to require the city to be a little bit less prescriptive about what it requires for these buildings and for these conversions. I think it’s going to take flexibility, and I think it’s a case by case basis. And many developers pointed out to me that not all office buildings in Portland are suitable for this, and it’s almost like a needle in the haystack kind of thing. One in ten, one in twenty buildings that could actually kind of pencil this out and could actually work. And that has to do with architectural structure, that has to do with seismic upgrades, that has to do with layout.
So it’s kind of a needle in the haystack. But I think there are a handful of buildings in Portland that the mayor’s office are honing in on as “this could be a possibility.”
Miller: Well, in fact, you got a hold of a list that somebody for the city has put together. What stands out to you in this list of potential buildings that could be ripe for these kinds of conversions?
Peel: I would say there’s a couple of threads that connected all these buildings. One, I think all of them, if not all of them, were built prior to 1970. And that’s partly because, after 1970, that’s when the architectural winds at that point were make it bigger, bolder, more windows. So most of the buildings on these lists were built prior to 1970. They’re smaller, so they’re a little bit more modest in size than some of these mega buildings. And they’re also less occupied, because again, it’s a renter’s market place and they’re probably going to go to the swankier ones, and there’s going to be some low hanging fruit with some of these older buildings.
Miller: When you add up the various costs though, what kind of likelihood is there that the resulting residential spaces, whether people can buy them as condos or rent them as apartments, that these would be some version of affordable housing, as opposed to luxury lofts or something that is really marketed to high end residential buyers?
Peel: Yeah, I think that’s really a tough part with these conversions is that our aim with these conversions is not to create more luxury apartments. But for developers, their return on investment really only makes sense, unless the city and state gives them just a really lucrative sort of package of incentives, they’re only going to make money in earnest if they have people paying $2,000 a month for rent. And I think that’s where this concept of individualized packages for each of these buildings really needs to come into play. There are state lawmakers who are sort of entertaining in this next legislative session setting up basically a state loan fund, where cities can borrow against that fund to help spur these developments, and then pay those loans back over 10 or 20 years. The city is entertaining a number of incentives like waiving system development charges, which are one time development fees, kind of tweaking seismic upgrade code to just shift a little bit what will trigger these really pricey upgrades.
What developers really stressed to me is that there’s no silver bullet. Even if you offer a 20 year tax abatement for these developers, that’s not all it’s going to take. It’s got to be state, it’s got to be city, and in some cases it’s got to be federal too.
Miller: We can think about a tax abatement as, in its own way, a government expenditure. It is public entities foregoing money they would otherwise get for some reason that hopefully the public agrees is a good reason. But if we think about this as a version of public spending, is this the best way to use public money if the ultimate goal is to create more housing? I’m asking this because you’ve just outlined all of the financial challenges, that everything has to line up just so, and even then there’s a possibility this is really just going to be more housing for rich people. Is this the best use of public money to create housing?
Peel: I’m not sure I’m the right person to have authority on that. But what I will say is that, at least the legislation that is heading towards this next session that would spur these conversions, it is targeted not for luxury housing, it is targeted for 120% area median income and below. So that includes affordable housing, and that includes what they call workforce housing, sort of middle income. So I think what the state and city do have to be prescriptive about is making sure that these incentives are only available to developers who will ensure that they’re going to keep it affordable for a 10, 15, 20 year period, or keep it affordable to middle income earners.
I think there’s kind of two things here. There has to be flexibility on the city level to work with developers to make these work. And then on the prescriptive side, we do have to make sure that these incentives can’t be exploited by developers that just want to make a ton of money off of luxury condos. And I will say in talks with the city and talks with state lawmakers, I think they are very much attempting to thread that needle.
Miller: Sophie, thanks very much.
Peel: Thanks for having me.
Miller: Sophie Peel is a reporter for Willamette Week. She joined us to talk about this idea of turning unused office space into condos or apartments.
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