Can office conversion help solve the housing crisis in cities?

The rise of remote working during the COVID-19 crisis significantly reduced activity in cities’ business districts, renewing policy makers’ interest in turning underused office buildings into much needed residential housing in cities. This creates a unique window of opportunity to shape more sustainable and inclusive urban development.

For decades, cities have struggled to provide enough affordable housing for their residents. Low- and middle-income households have been priced out of many unaffordable cities. Between 2012 and 2020, for example Sydney’s house prices increased by 45% compared to the 25% national average across Australia. In Amsterdam, they rose by more than 50%, against the 20% national average. Throughout the COVID-19 crisis, many cities deployed novel measures to support needs during the crisis. For example, New York and Bilbao sheltered homeless people; Lisbon froze social housing rents; and Los Angeles introduced a moratorium on evictions on tenants who were unable to pay their rent.

However, most of these measures are temporary, and more sustainable solutions are needed for housing affordability. With the widespread adoption of remote working, many firms are now reconsidering their need for office space in city centres. For example, a recent survey in the UK found the expected use of office space is expected to fall by 9% going forward. This will present new opportunities for policymakers to seize the initiative to convert vacated space into new and better housing for residents.

Source: https://voxeu.org/article/covid-19-and-structural-change

Not a new, but a limited phenomenon

Office conversion is not new in cities. In Frankfurt, Germany high office-vacancy rates in the neighbourhood of Niederrad, originally conceived as an office district, motivated a large-scale conversion project at the end of the 2000s. Between 2007 and 2015, about 3 000 apartments were completed and the office district became a lively, mixed-use neighbourhood equipped with new amenities and infrastructure, such as children day-care facilities, parks and bicycle lanes.

In addition to creating more accommodation and alleviating pressure on housing markets in cities, office conversions provide an opportunity for better quality housing and more sustainable urban development. Evidence shows that rehabilitation of an existing building can emit 50% less carbon than demolition and rebuilding. Office conversion also tends to be more easily accepted than new construction by neighbourhood residents, saving time and money in the approval process. It can also help curb urban sprawl, related environmental costs and alleviate pressure to provide services and infrastructure to increasingly spread-out populations.

Despite these advantages, office conversion into residential housing, at least prior to the current crisis, has been limited in OECD city centres, notably because of relatively high demand for office space, but also because of technical,  financial or regulatory constraints. In Paris, for example, less than 1% of the total housing stock comes from office conversion.

Differences between office and housing standards, for example, can make conversion difficult and costly. The prevalence of beams and pillars in some office buildings built in the 1960s and 1970s, the low ceiling height or the lack of natural light in some buildings, impose major technical and financial barriers to residential use, often making conversions more expensive than demolishing and rebuilding. Some office building owners may also be reluctant to engage in the conversion process, preferring to hold the asset at book value in the hope of appreciation, rather than sell it at a discounted price. Moreover, legal and regulatory aspects, such as differences in building laws for offices and housing, or stringent municipal zoning plans, can hamper office conversion. Finally, vacant office buildings are sometimes located in peripheral or industrial areas that lack access to amenities, transport or public services.

What’s next for office conversions?

At the national level, a number of possible policy measures could be explored to encourage conversions of empty or under-utilised buildings. These include, for example, technical assistance, and fiscal instruments such as property tax incentives for the conversion of vacant buildings or conversely split-rate taxes to disincentivise building owners to keep half-empty buildings rather than selling or converting them. At the local level, governments could facilitate the change from office to residential use through land-use and spatial-planning, policies, as well as partnerships with the private sector to develop public assets – for example through asset backed vehicles. Land-value capture instruments could also help support the financing and provision of new infrastructure and amenities (such as transport, green spaces and other public services) that may be needed in the urban areas where conversions take place.

The pandemic has opened up a unique opportunity for policymakers to reclaim urban space for housing in order to address supply and affordability challenges, while curbing urban sprawl. But office conversion alone will not solve the longstanding housing crisis in cities. However, it can add to national and local governments’ arsenals – provided that conversions do not create only high-end accommodation for a happy few and further polarise the housing market. Let’s make the most of the opportunity to make quality housing more affordable for all in cities.

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Economist/Policy Analyst at | Website

Camille Viros is an Economist/Policy Analyst in the Cities, Urban Policies and Sustainable Development (CITY) Division of the OECD Centre for Entrepreneurship, SMEs, Regions and Cities (CFE) where she works on National Urban Policy Reviews, as well as on various urban issues such as housing in cities, smart cities & inclusive growth, and COVID-19 recovery & resilience in cities. Prior to joining the OECD, she worked as an economist in the private sector in London, where she was leading thematic research projects on a wide range of topics including climate change and population ageing, and conducting macroeconomic analysis. She graduated from HEC Paris, the Paris School of Economics and Sciences Po Paris.

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Prof. PhD. Economist | Website

Ingrid Nappi has been a research tenured professor at Essec Business School since 1995 and holder of the Real Estate and Sustainable Development Chair which she created in 2002. She concentrates her research mainly on sustainable cities and sustainable real estate as well on work spaces in organisations. She holds a PhD in Applied Economics from Paris XII University and a post-doctoral degree for PhD supervision in Management, Paris Dauphine, and in Planning and Urbanism, Institut d’Études Politiques of Paris. She used to be the President of ERES (European Real Estate Society). (Photo credit: ©Sophie Loubaton)