In a bid to revitalize a still-too-quiet downtown, and possibly create hundreds of new homes, the city of Boston plans to launch a short-term pilot program this fall to convert office buildings into housing, offering steep property tax breaks to developers who “immediately” convert their “underutilized” downtown offices to residential use.
Such conversions are notoriously tricky and expensive, as the physical dimensions of many offices do not align with requirements for apartments or condominiums. But the practice has caught on in several major cities — often with public assistance in the form of incentives or other tax breaks — as the commercial office sector has struggled following the COVID-19 pandemic and the cost of housing has continued to soar.
“Through this conversion program, we seek to incentivize lenders, property owners, downtown stakeholders, and the state to partner with the city to increase the production of much needed housing in our downtown core,” said Arthur Jemison, director of the Boston Planning and Development Agency, in a statement.
Boston’s pilot program would allow for buildings in the core of downtown to switch from a commercial property tax rate — currently $24.68 per $1,000 of assessed value — to a standard residential property tax rate of $10.74 per $1,000 of assessed value. The properties would then also be eligible for an up to 75 percent discount on that lower residential rate for 29 years through an agreement between the city, the BPDA, and a developer, and the payments would be made to the city through the triparty agreement.
Such a discount could mean that a building valued at $10 million could see its annual tax bill drop from $246,800 as an office to as low as $26,850 as a residential dwelling.
Specific terms will be worked out project by project, with some buildings paying taxes at lower rates just after conversion and higher rates later in the 29-year-term, the city said. “The City will work with developers to determine the terms that will provide a feasible project,” a city spokesman said in an e-mail. “Even a few conversions would have a meaningful impact in creating a 24-hour, mixed-use neighborhood in Downtown.”
The Financial District — and Downtown Crossing alongside it — is the city’s largest office submarket by far, and one that has been slow to return to prepandemic norms, unlike other office-dense neighborhoods such as Back Bay and the Seaport. The city’s office market, particularly older, less-expensive class B and class C properties, has struggled to regain its footing following the pandemic and the resulting shift to work-from-home culture that has fewer corporate tenants looking for new homes. Since the pandemic, a majority of commercial leases in Boston have been signed for newer class A properties, leaving class B and C emptier — likely making those better candidates for conversion.
A preliminary study of office conversions in the Financial District, North Station area, and Chinatown, completed this month by HR&A Advisors Inc., Utile Inc., and PM&C, studied 445 buildings spanning a combined 56.6 million square feet, and led to “several targeted conversations with groups of developers” to discuss conversions, a city spokesman said in an e-mail.
It’s not clear how many Boston offices would qualify for a conversion, but the city expects to have a better sense of that once it begins receiving applications this fall.
“Based on the preliminary HR&A analysis, there are a large number of buildings clustered in the Wharf District and Ladder Blocks between Tremont Street and Washington that would be good potential candidates for conversions,” a city spokesman said in an e-mail.
One prominent downtown office owner and developer, David Greaney of Synergy Investments, said his firm has had “a number of constructive conversations with the BPDA” about possible conversions.
“There is still work to do to encourage the stakeholders to proceed,” said Greaney, whose firm owns more than 20 office buildings in Boston. “We look forward to seeing the full details of the conversion program.”
The program comes at a time when housing production has slowed in Boston. From January through June of this year, new housing permits have dropped by 50 percent compared with last year, according to data from the Mayor’s Office of Housing. Developers pulled permits for some 1,414 housing units during that six-month period, compared to 2,840 for the period a year prior. However, 2022 was something of an anomaly. This year’s numbers are more in line with the average of 1,542 permits pulled in the first half of the years 2019 through 2021.
Mayor Michelle Wu has long advocated for creating more affordable housing, and buildings converted under the pilot program would have to comply with her new, expanded, affordable housing requirements — which Wu proposed in May but have not yet been enacted by the BPDA. They mandate setting aside 17 percent of units in new buildings at lower, income-restricted rents — up from the current 13 percent required in most rental buildings — and reserving 3 percent of a project’s square footage for those with housing vouchers.
“This program will help us take advantage of the opportunity we have to rethink Downtown as a space where people from all over come together to collaborate, create, live, and play,” Wu said in a statement.
Projects would also be required to meet new energy efficiency code standards aimed at reducing fossil fuel usage in commercial properties, and developers would be encouraged to keep the ground floors open for retail or other public use.
The program is intended to be a short-term solution: it would accept applications beginning this fall through June of next year, and developers looking for the discount would be required to start construction by October 2025. There’s no cap on how many properties could apply.
If developers end up selling a converted building, the city would charge a 2 percent fee on the sale to recoup forgone tax revenue. That 2 percent fee is separate from and would be in addition to the Wu administration’s proposed 2 percent transfer tax on sales of high-dollar real estate, which is intended to generate more funding for affordable housing and awaits a legislative vote on Beacon Hill.
Developers have long lamented the costs of converting offices to housing, saying they’d need some form of government assistance to make such projects work from an economic standpoint. Tamara Small, chief executive of commercial real estate industry association NAIOP Massachusetts, on Monday applauded the administration for moving forward with office-to-residential incentives.
“It’s great that the city recognizes the challenges associated with converting office projects to residential and the need for assistance from the public sector,” Small said.
With windows that don’t open, centralized HVAC systems, and large elevator cores, converting downtown offices to residential properties is “extremely difficult,” said Bruce Percelay, chairman and founder of real estate development firm the Mount Vernon Co. But an up to 75 percent discount on property taxes could incentivize developers to pursue conversion projects they wouldn’t have considered in the past, he said.
“Property tax incentives are the most meaningful arrow that the city has in its quiver to stimulate production,” he said. “Hearing this will start the wheels turning in the heads of developers as to how to take advantage of this program.”