OR IS IT A NEW BEGINNING?
Back in February 2023, the Wall Street Journal reported that U.S. office occupancy rates surpassed 50% for the first time since the COVID-19 pandemic. Notwithstanding that improvement, hybrid work models and low demand continues to plague commercial real-estate portfolios. Return-to-Office mandates gained some traction in 2022. Yet, many companies softened those policies in 2023 to maintain a competitive edge and retain talent. In major U.S. sectors, with many commercial buildings having vacancy rates ranging between 25% to 50%, there is much debate about what can be done to save the sector given the approaching wave of defaults on maturing debt.
One response has been to incentivize residential conversions.
Under President Biden’s economic agenda—coined “Bidenomincs”—the White House has rolled-out a new initiative to support the conversion of high-vacancy commercial buildings to residential use—by way of financing, technical assistance, and the sale of federal properties. That agenda utilizes a multi-agency approach, including resources from the Department of Housing and Urban Development (HUD) and the Department of Transportation (DOT).
To encourage conversions, the White House has released a “Commercial to Residential Federal Resources Guidebook: A Guidebook to Available Federal Resources,” citing 20 federal programs that can be used to “fast-track” the process. These programs provide federal grants, tax incentives, low-interest loans and loan guarantees, which may be utilized to increase the economic viability of conversion projects—subject, of course, to certain requirements for property owners and developers. And DOT is rolling-out new assistance through direct engagement with federal agencies and third-party intermediaries to support municipalities and developers seeking to utilize DOT’s tools to finance conversions.
On a local level, New York City Mayor Eric Adams launched the “City of Yes” program to convert underused commercial real estate into affordable housing. That program touts that it will make it easier for vacant offices and other commercial buildings to become homes—cutting through the “red tape” of outdated zoning laws. By way of example, outdated zoning restrictions prohibit many New York City buildings constructed after 1961, or outside of the city's largest office centers, from being converted to housing units.
But are such programs able to stop the predicted avalanche of defaults on commercial loans maturing between 2023 and 2026? And if residential conversions falter, what is the long-term solution to address the plight of underused office space?
We’ll find out soon enough ….
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