Converting Office Space to Residential Housing

Converting Office Space to Residential Housing

INSIGHTi

Converting Office Space to Residential
Housing
September 27, 2023
Since the COVID-19 pandemic began, telework has increased on average—estimates vary, but several
sources show a significant increase—leaving some office space unused or underutilized. According to the
National Association of Realtors, the vacancy rate for offices increased by 3% between 2019 and 2022. At
the same time, residential housing supply has been constrained, leading some to suggest converting
unused office space to residential units. This Insight discusses some of the key debates surrounding the
idea of office conversions as well as policy considerations in this area.
Converting Offices to Residential Units
Much of the potential usefulness and feasibility of converting office spaces to residential spaces is
dependent upon the physical characteristics of a building itself and the economic and housing
characteristics of the surrounding area. More generally, however, there are several potential advantages
and challenges to such a conversion.
Some potential advantages include:
• Land use restrictions. Restrictions on where new property can be built can limit new
housing, whereas converting existing commercial real estate to residential may avoid
some of these restrictions.
• Timeline and cost. Depending on how well-suited a building is to conversion, it may be
quicker and cheaper to convert it to residential use than demolish it and start a project
from scratch.
• Environmental impact. Conversions may often require fewer material inputs than new
construction projects and could add more “green” features.
• Revitalization. “Downtown” areas may struggle economically with a decline in
commuters. Conversion of office space to residential space may help downtown
economies become less reliant on commuters. Lowered property values in general may
also lower local government revenues, and conversions may slow or stop such a decline.
Some potential challenges include:
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• Zoning and building codes. Changing zoning from commercial to residential may be a
difficult and lengthy process. Conversions may also require that other divergences
between residential and commercial building codes be addressed, adding cost.
• Suitability. Owing to differences in the characteristics of office and residential spaces,
conversions may not be cost-effective or viable in many cases. For example, access to
windows in all bedrooms or the inclusion of additional kitchens and bathrooms may be
logistically challenging given some office layouts or existing plumbing. Additionally,
buildings are typically required to be empty—not just underutilized—for a conversion to
take place.
• Profitability. Given conversion costs and current rental income values of commercial
units versus expected value of residential units, it may not always be profitable for
developers to take on conversion projects.
• Demand. Potential residents may have a preference to live in more established residential
areas that have amenities that business centers may lack, such as grocery stores. This
preference may be stronger in cases where individuals can work remotely at least part of
the time, lowering the convenience of living near work.
Policy Considerations
Many of the considerations surrounding conversions are local in nature. To the extent that state, local, or
federal governments want to incentivize conversions, policymakers may want to consider the differing
local economic, commercial, and housing market conditions. From an economic perspective, federal
policy intervention may not be efficient if the benefits of conversions are fully realized locally.
Housing Supply and Affordability
Several factors may affect the potential impact of office-to-residential conversions on housing supply.
First, how many units can be added by conversions alone, and what other options are available to meet
housing demand? Conversions are not likely to add enough units to solve housing supply issues, but
depending on the availability and feasibility of conversions in a given location, they could be an effective
tool.
Second, some locations may not have an overall housing supply problem so much as an affordable
housing supply problem. Given the potential costs of conversion, not all conversions are likely to result in
housing at the desired price point. Increasing overall supply may have some effect on average prices, but
depending on how many new units are produced, this effect could be marginal.
The Future of Telework
It is uncertain how many workers will telework in the future and how often. While norms surrounding
remote and hybrid work have shifted notably in the past few years owing to the COVID-19 pandemic, the
extent to which remote work will shift the commercial real estate landscape is not certain. While rates of
office utilization are lower than prior to the pandemic, according to some estimates, they have, on
average, trended upward in most major cities since the beginning of the pandemic. And many argue it is
likely that supply and demand for office space will return to balance in the longer term regardless of
telework trends.
Trends in labor markets may also play a role here, with tighter labor markets—ones in which workers are
scarcer relative to the demand for them—potentially resulting in more telework. For the past couple of
years, the overall labor market has been characterized by fewer unemployed workers than available jobs,

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likely giving workers a greater ability to demand flexibilities such as telework. However, the labor
market is cooling. If and how this will affect the amount of telework moving forward is uncertain.
Federal Government Initiatives
State and local governments have enacted policies, both historically and recently, to incentivize
conversions, including through tax incentives, grants, and exemptions. Housing and land use policies tend
to be regulated at the state or local level, but federal policy can still play a secondary role. Some federal
programs could potentially be used for the purpose of conversions. A few recent examples of federal
initiatives focused specifically on conversions include:
• The Biden Administration Housing Supply Action Plan promotes “commercial-to-
residential conversion opportunities, particularly for affordable and zero emissions
housing” through efforts such as an interagency working group to advance federal
funding opportunities that support conversions.
• The U.S. Department of Housing and Urban Development issued a notice of funding
opportunity to research conversions, which will award up to $860,000 to study
conversions and their challenges, identify metrics for evaluation of outcomes, and
develop a guide for local leaders and practitioners.
• H.R. 419, the Revitalizing Downtowns Act, was introduced in January 2023. This bill
proposes tax credits for qualified conversions.

Author Information

Lida R. Weinstock

Analyst in Macroeconomic Policy

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
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