In the midst of a historic housing shortage, the idea of converting Portland’s surplus of vacant office buildings into apartments seems like a no-brainer. But the high cost of that type of conversion has kept most developers from going through with it.
On Wednesday, the Portland City Council unanimously passed a pair of incentives aimed at quashing property owners’ financial concerns and spurring residential development in downtown Portland.
“As we’re all aware, our central city recovery has been slower than many cities across the country,” said Commissioner Carmen Rubio. “At the same time, we’re in a housing crisis and must look at every avenue available to increase production.”
Two data points illustrate the problem Rubio and her colleagues are trying to solve: In 2022, Portland’s downtown office vacancy rates rose to 27%, up from 22% the previous year, while the entire metro region’s housing vacancy rates dipped to 4.9% from 6% in 2021.
One of the policies approved Wednesday exempts office-to-residential building conversions from having to pay system development charges, or SDCs. These are fees the city usually requests from developers to cover changes to public infrastructure that may result from a building redesign, like an increase in residents using the sewer system or relying on nearby public transportation. SDCs can often total tens of thousands of dollars, easily deterring developers from making big building conversions. This waiver of SDC costs will only apply to developers converting a building to residential use who comply with a required seismic upgrade in the process. The policy will cover up to $3 million in SDC costs, or the cost of the seismic upgrade, whichever number is lowest.
This particular exception is only in place until 2027, in hopes of expediting development in the immediate future. If developers choose to request a system development charge exemption under this policy, they must agree to keep the building residential for at least 10 years. The converted building must also comply with the city’s inclusionary housing policy, which requires all residential buildings with 20 or more new units to keep a certain percentage of rents affordable for low-income tenants.
The second incentive will technically lower the seismic improvement standards for buildings being converted from office buildings into multi-unit residential buildings. This means developers will have to pay a little less to meet the level of seismic retrofits required under city code when a building changes occupants.
While this change effectively lowers the standards of seismic resilience for buildings, city staff with the Bureau of Development Services say the reduction will still require buildings to meet a “life safety performance level” in the event of an earthquake. This means a building will need to be stable enough to not collapse on occupants during an earthquake and allow people to safely exit the structure afterward. According to city staff, the adjusted standard is aligned with residential building requirements in other cities threatened by seismic activity, including San Francisco.
At the Wednesday council meeting, real estate developers bemoaned the current costs of seismic upgrades. They urged the council to drop costly seismic upgrade requirements for buildings being converted from offices to apartments entirely.
Real estate developer Jim Atwood explained how in 2015, he was considering renovating an office building he owned in downtown Portland. At that time, the estimated cost to perform the required seismic renovation was around $1.7 million, while the cost to tear the building down and replace it with a new one came in at nearly half that.
Even with the new policy exceptions, Atwood said, the cost is still going to deter developers.
“There’s not enough money to make it worthwhile,” he said. “If it was financially feasible to seismic upgrade our buildings, we’d do it. If you can reduce or eliminate the seismic update requirements, you’ll do something to contribute to more downtown housing.”
Amit Kumar, a structural engineer at the city’s Bureau of Development Services, explained to commissioners that, although the costs can be challenging for some developers, the city should not dismiss seismic safety concerns.
“It is definitely an expensive proposition to do any kind of seismic upgrade, that is true,” Kumar said. “But these older buildings have been proven, in earthquake after earthquake, to be very dangerous buildings. Yes, the cost is there, but the safety of the occupants of the building is very important.”
Other developers pitched additional incentives they say city leaders could make to further spur office conversion.
“The ordinances before you today are very important in laying the groundwork to eventually enable office to residential conversions, but they will most likely not result in additional housing units in Portland in the near term,” said Michi Slick, a real estate developer with Killian Pacific.
Slick endorsed four proposals pitched by Oregon Smart Growth, a developer advocacy group, including a moratorium on SDC fees for all housing projects in Portland and reforms to the city’s inclusionary housing policy to expand the development of market-rate housing units.
“We have much more to do to address housing needs and our central city,” Slick said.
Despite developer hesitancy, the dual policies received support Wednesday from a number of business representatives and affordable housing advocates.
Kai Krenek, co-owner of Fuel Yoga Workouts, told commissioners that his Southwest 2nd Avenue business has seen a substantial dip in revenue since the pandemic’s reliance on hybrid work shuttered many downtown office buildings — moving potential clients out of downtown.
“As a brick-and-mortar in the downtown area, we rely heavily on the health and usage of other buildings,” Krenek said. “It seems like a logical step to take is to facilitate the transformation from commercial to residential buildings.”
Commissioners centered developers’ concerns in their closing remarks, questioning whether this incentive package was enough to spark actual conversions.
“I recognize the difficulty of the policy choice we have to make here,” said Commissioner Rene Gonzalez. “We are protecting future citizens against a seismic event, which by definition is likely catastrophic. And we’re balancing that against a real true emergency on our streets and lack of affordable housing right now.”
Mayor Ted Wheeler noted that the conversion proposal is just one of several commitments the city is making to address housing availability and affordability.
“This is not the solution to our homeless crisis,” he said. “But this is an important tool that can be used to further our suite of responses to the homeless crisis, while we also address the fundamental question of: ‘What makes urban areas successful in a post-COVID environment?’”
Portland’s new incentives will go into effect immediately. Cities across the United States have also proposed policies to entice developers to turn vacant offices into apartments.
Oregon state lawmakers are considering approving similar incentives this session. House Bill 2984 would require local governments to waive system development charges for developers seeking to convert a commercial building into a residential property. The bill would also require local governments to allow this conversion to take place without a zone change if required. Zoning changes aren’t necessary in downtown Portland when converting offices into apartments.