Office Conversion Tax Breaks Grow as Cities Revitalize Downtowns

San Francisco, Boston, Chicago, New York, Washington, DC, and other major US cities continue to experience double-digit commercial vacancy rates in their business districts, hurting their tax bases.

One idea that caught on during the Covid-19 pandemic—and is now coming to fruition—is for cities to offer tax breaks and other financial incentives to encourage developers to convert idling office spaces to housing in struggling downtowns.

While each office-to-residential program is structured differently, the initiatives typically include a housing affordability requirement and are designed to simultaneously address high office vacancy rates and the shortage of new housing.

“It’s really important to make sure that areas historically dominated by office buildings remain economically productive,” said Tracy Hadden Loh, a fellow at the Brookings Institution. Loh listed Chicago, Boston, and Washington as having the greatest vulnerabilities to fiscal impact based on her analysis.

This embrace of adaptive reuse is designed to give office spaces a second act, revitalize struggling business districts, and give developers an opportunity to reduce their tax burdens.

According to Moody’s, US office vacancies hit a historic high of 20.1% in 2024. But the year also marked an uptick in office conversions: A total of 103 projects were expected to be completed by end of year, up from 63 in 2023, according to CBRE, with nearly 75% of those conversion projects slated for multi-family housing.

“Everyone is taking a look at this right now,” Loh said. “Post pandemic conversion projects are moving forward.”

Gaining Traction

Many of the policy initiatives laying the groundwork for these projects materialized in just the past few years. In 2022, for instance, Pittsburgh launched its pilot Downtown Conversion Program, most recently announcing a plan to invest $600 million to spur economic growth in the city. In March 2024, San Francisco passed a measure backed by then-Mayor London Breed to waive the real estate transfer tax on converted office space. A program in Boston offers tax abatements of up to 75% percent over as long as 29 years.

But these efforts aren’t without challenges. Not all buildings are well-suited for conversions, developers may have to navigate regulatory hurdles, and the conversion process can be costly since most office buildings weren’t originally built for residential use.

Across regions, industry experts cautioned that tax relief in the form of abatements may not be enough to entice large numbers of developers to participate. According to Grant Steinhauser, a principal in the real property tax practice at Ryan LLC in Washington, the majority of market participants he’s spoken with were “not interested in the program at all” or are considering doing conversion projects without the abatement.

“You know the tax abatement is a hit to revenue, locally,” said Cindy Roubik, deputy commissioner at the Chicago Department of Planning and Development. “The issue with abatement that we found is abatement only happens after you complete your project. You have to fund the project first and build. We think we would have had difficulty doing that given our mandate to make downtown more equitable. I don’t know that that would have been a successful way for us to proceed.”

‘Big and Expensive’

Loh said there are several “myths” about conversions, including that it’s more cost-effective and a cheaper way to produce housing compared to new construction. CBRE found the cost of converting vacant buildings ranges between $250 and $650 per square foot.

“These project are big and expensive, and interest rates are really high right now,” she said. “Construction costs have gone up so much that the potential rent that these products produce is just not enough to cover the cost.”

Officials in Chicago, Boston, New York, and other cities said they’ve communicated about their respective office conversion efforts, though there’s no universal approach, as certain tax incentives in one place might not have the same effect in another.

Being successful at office conversions means knowing a specific market, setting clear goals, an d assessing the best approaches.

“Some markets have a lot more experience with adaptive reuse than others—in New York, this is not a surprise to anyone. They know how to put these projects together and how to execute them,” said Loh. “But in other markets, it’s never happened. This is a totally new conversation, and so that is really challenging because it means that not only do developers have to figure out a new value proposition and new building skills that they’ve never had to do before, the cities also have to figure it out.”