I spent 20+ years developing properties in Chicago; built over 700 homes and over 1.5 million sf of office space.
I love Chicago. Guess what? The largest major cities are becoming somewhat obsolete. The need to cram a bunch of people into a very confined area is going out the door. I'm not suggesting these large urban centers are going to disappear, simply that they're going to contract.
The internet, Zoom and the Pandemic brought the Genie out and it's not going back in the bottle. That means that well-intentioned urban developers who think their office-to-residence conversions will work may face some very unpleasant surprises (especially in light of the rising real estate tax burden and crime).
There are certainly a few exemptions but I suspect Chicago isn't one of them.
How Mayors Plan to Save Downtown
Turning empty offices into housing can help, but a tax subsidy is risky.
By The Editorial Board, WSJ
July 28, 2023 6:26 pm ET
America’s mayors have found a favorite solution for their cities’ desolate postpandemic downtowns: turn vacant corporate towers into bustling apartment buildings. Office conversions have worked before, and good policies can help. But city dwellers beware. The wrong approach can leave a dent in local budgets with little to show for it.
Boston Mayor Michelle Wu is the latest to pledge public support for office transformations. She announced a plan this month that would slash the tax owed on properties that landlords plan to convert. The buildings would be taxed at the residential rate of about 1.07% instead of the corporate rate of 2.47%. They could also earn a further reduction of 75% for up to 29 years at the city’s discretion. The annual tax bill for a $15 million building could drop to about $40,000, from today’s $370,500.
Other cities have joined the trend. San Francisco amended its planning code this month to ease conversions, and Philadelphia recently renewed a 10-year tax break for the same purpose. Policy makers in Chicago and Los Angeles are in the early stages of similar proposals.
The idea is to cut the cost of renovating underused assets into desperately needed housing. Cities like San Jose and Washington with low rates of office occupancy also boast some of the nation’s highest apartment rents. Conversions can pay off for developers, such as in New York in the 1990s and 2000s, when 13 million square feet of downtown office space became housing. But the complex, costly renovations can make conversions impractical, and building codes sometimes bar them altogether.
City halls are determined to give developers a boost, but their methods vary widely. Recently proposed policies can be divided into good, bad and ugly:
• Planning reform. The best way to help office redevelopment is to get unnecessary rules out of the way. Local codes for residential buildings often include restrictions on ground-floor retail, width limits for elevators and stairs, and other provisions that make conversions tough.
Easing such rules uncorks pent-up demand for housing without costing taxpayers. San Francisco’s Planning and Urban Research Association estimates that the city’s pending code changes could enable the creation of 4,200 apartments from older, underused office properties.
• Tax breaks. This is the first tool most policy makers reach for, and it’s often used clumsily. General property-tax cuts are a reliable way to spur development and grow a city tax base over time. Yet most mayors, like Boston’s, opt for limited carve-outs for specific purposes.
Special tax breaks for conversions let developers pursue projects on the edge of profitability. That can benefit or harm a city depending on the strength of its residential market. Defenders of subsidies point to the successful program in lower Manhattan, where conversion properties got a 14-year tax abatement. Yet it’s wasted aid if apartment demand stalls, instead of surging like it did for two decades in New York.
• Affordability set-asides. This is the ugly part of the policy mix. Mandating units for affordable housing is a matter of dogma for progressive planners. But the inability to rent units out at their market price often makes it impractical to build in the first place.
Washington Mayor Muriel Bowser wants converted buildings to include 15% affordable units to get a tax break. New York Gov. Kathy Hochul proposed a 20% rule in a budget plan this year, which Democratic legislators tried to raise to 40%. These policies are self-defeating. As the set-aside for affordable units grows, so does the subsidy required to attract developers.
The problem of depopulated downtowns will likely drag on for years, with every mayor and governor promising a turnaround. The ones who deliver might be those who clear away needless regulation and then trust the market to work.