Mayor Wu’s Office to Residential Conversion Pilot Program Prioritizes Downtown Revitalization over Housing Production, Fiscal Responsibility

In July 2023, in response to a soft post-COVID office market and a daunting housing crisis, Boston Mayor Michelle Wu created a Downtown Office to Residential Conversion Pilot Program. The program uses property tax breaks of up to 75 percent of the assessed value for 29 years to incentivize property owners to convert Downtown Boston office space to apartments or condos. The program also requires the converted residential properties to conform to the city’s stretch energy code and inclusionary zoning policies for new development and institutes a 2 percent real estate transfer tax on future sales of those properties. 

Applications for the program were originally due by June 2024, with construction due to start on the conversions by October 2025. As of June 2024, the BPDA has approved two such applications totalling 110 units, with another 7 projects constituting 302 units in the approval pipeline. The program was extended through the end of 2025 on June 24, 2024 after Governor Healey committed $15 million in direct subsidies, and up to $215,000 per unit, for deed-restricted housing in downtown office-to-residential conversion projects.

Notably, the Conversion Pilot Program doesn’t allow office-to-residential conversions in places they weren’t already allowed, and it doesn’t change the process for approving the development itself. Instead, the original program merely streamlines the process for creating subsidy packages (in the form of tax abatements) for property owners who convert their office buildings to residential. In some of the underlying zoning districts included in the program, multi-family housing development still requires discretionary approval from the Zoning Board of Appeals.

Meanwhile, since successful conversions will result in these once-commercial properties paying Boston’s (much lower) residential tax rate, this program is likely to be very expensive, even without the property tax abatements. In this light, it’s worth understanding why the Mayor has undertaken this Conversion Pilot Program, especially given the city’s impending budget woes linked to falling commercial real estate values. 

Consider an analogous proposal that didn’t move forward because of its fiscal burden. In September 2023, Mayor Wu announced a plan to use property tax abatements to encourage Boston’s 23,000 housing units that had been permitted but hadn’t started construction to move forward. A team of Harvard economists, including Ed Glaeser and Denise DiPasquale, analyzed the proposal’s effectiveness and found that even the most cost-effective property tax abatement paradigm would require the city to forgo almost $300,000 in revenue per unit built. Mayor Wu tabled the proposal in January 2024, citing the high costs of using tax abatements to jumpstart development. This begs the question: if the proposed tax break for getting stalled construction projects to move forward was cost-prohibitive, why is the Conversion Pilot Program any better?

In the new state-subsidized iteration of the program, the city doesn’t have to forfeit nearly as much property tax revenue. And by tying the subsidies to the construction of affordable units, the program is arguably alleviating the costs of conversion more directly than it would be with tax abatements.

But more broadly, the answer involves the Conversion Pilot Program’s role not just in housing production, but in facilitating downtown resilience to real estate market cycles. According to the city’s press release, the two goals of the program are to create housing and revitalize the downtown amidst sky-high office vacancy rates. In theory, more housing could expand the customer base of downtown retailers and lead to more vibrant 24/7 street life in the neighborhood. It could also help prevent an “urban doom loop” of declining commercial property values and cuts to city services in the future. Mayor Wu’s Conversion Program will almost certainly be more effective at neighborhood revitalization than creating housing, especially given the scale of the housing shortage in Massachusetts more broadly. 

But members of the real estate industry have also expressed skepticism that the Conversion Pilot Program offers a salient solution to the housing crisis. According to real estate services firm CBRE, only 486 office-to-residential conversions occurred nationwide from 2000 to 2022. These conversions are most common in Manhattan, seemingly more because of office space characteristics there than public policy. In 2022, CBRE also found that fewer than 500,000 square feet of office space is suitable for residential conversion in Boston, absent any special incentives. 

Also, the buildings most suitable for conversion – often older, Class C buildings with per-square-foot rents closer to that of residential properties – tend to be small, making it difficult to create a substantial amount of new housing. Among large buildings (50,000+ square feet), the city of Boston has 77.4 million square feet of Class A or A+ office space, 24.7 million square feet of Class B office space, and just 1.3 million square feet of Class C. Governor Healey’s $15 million subsidy package is targeted to buildings containing at least 70,000 square feet, likely eliminating many of the best candidates for conversion. 

That said, it will only take a few larger buildings to fully utilize the $15 million, and such subsidies may greatly expand the pool of viable conversions. In contrast to CBRE’s conservative estimate of 500,000 square feet, architecture firm Gensler has found that 30-40 percent of the Downtown Boston office buildings in its database “warrant further consideration for conversion,” constituting between 3 and 5 million square feet. The difference between the CBRE and Gensler numbers is that CBRE considered the financial feasibility of the conversions under current market conditions, whereas Gensler mainly considered whether the physical attributes of the buildings and their surrounding location are suitable for housing. 

Almost every other North American city with a substantial office-to-residential conversion program relies heavily on subsidies. Calgary directly subsidizes the construction costs of office-to-residential conversions up to $75 Canadian per square foot. Philadelphia has had a property tax abatement program that applies to conversions for decades, through which it funded the Franklin Tower conversion project. Pandemic-era proposals in Chicago and D.C. also involve hefty property tax abatements.

But there may be ways to incentivize office-to-residential conversions without forgoing city revenue for decades. In a series of recommendations regarding San Francisco, Gensler touted one-time, up-front cost reductions as incentives for office-to-residential conversions. These tools, like waiving impact fees, open space requirements, or inclusionary zoning mandates, may be a good alternative to property tax abatements that don’t hurt the city’s coffers. They also may play a bigger role in making office-to-residential conversions more financially viable for property owners, as the up-front conversion costs are often most prohibitive, while property tax abatements only subsidize operating expenses. 

New York City’s office to residential conversion efforts have similarly focused on streamlining regulatory processes and allowing more buildings to convert. The New York proposal only offers property tax abatements for buildings that meet certain affordability criteria or include on-site childcare facilities. Governor Healey’s subsidy package does something similar to this by tying the subsidies to the number of affordable units, and half of the subsidy is paid upon issuance of a building permit, potentially helping to alleviate construction costs. But it’s unclear whether such regulatory incentives are sufficient to make most conversion projects worthwhile for investors, and the Healey subsidies don’t actually give any flexibility on the number of affordable housing units to be created. 

To summarize, the Downtown Office to Residential Conversion Pilot Program is, by itself, not a scalable way to address Boston’s housing needs. In its current form, it also lacks fiscal prudence. But it might be a good way of rejuvenating downtown activity post-COVID. 

In an imminently budget-sensitive environment, Mayor Wu’s options for advancing office to residential conversions are limited, and Governor Healey’s added subsidies will almost certainly run out by the end of 2025. The best way forward is to limit property tax abatements as much as is feasible, relying more on expedited permitting, more flexible zoning, and other up-front cost reductions to entice property owners to propose projects. In particular, BPDA staff should have much less discretion over things like off-street parking and internal and external design details, as related requirements often raise the costs of conversion. Further, the city’s environmental review procedures should be waived for all adaptive reuse projects, as modifying existing buildings has a much lower environmental impact than new construction.

By itself, this reform approach may be unlikely to create much new housing in the short-term, but it would be an important step for Mayor Wu in realizing her ambitions to cut red tape in the city’s zoning code and development process. After the comprehensive rezoning process is complete, a more generous and streamlined procedure for permitting adaptive reuse, including allowing office-to-residential conversions everywhere by right, should enable more housing production both beyond downtown and in a greater variety of buildings.

 

 

Andrew Mikula is Pioneer Institute’s Senior Housing Fellow. Beyond housing, Andrew’s research areas of interest include urban planning, economic development, and regulatory reform. He holds a Master’s Degree in Urban Planning from the Harvard Graduate School of Design and a Bachelor’s Degree in Economics from Bates College.