Incentivizing Or Buying: How Local Governments Can Fan The Flames Of Office Redevelopment

Struggling office districts have emerged as a major economic and urban planning challenge for cities across the country.

As older, Class-B and C office buildings become emptier and owners have less money to put into them, they become a drag on the surrounding area while contributing little to the tax base. 

The question for cities across the country today is how to pivot these buildings into productive and vibrant uses — a mission that has proven difficult for private developers to spearhead in a tight financing environment.  

The solution may be for local governments to take a more active role in incentivizing conversions and even buying distressed properties themselves, several developers and downtown business advocates say. 

“Cities are going to have to get involved,” Granite Properties Chief Operating Officer Greg Fuller said onstage at the National Association of Real Estate Editors conference in New Orleans last week. 

“Governments are going to have to get involved in subsidizing these in order to make more of them where they're even possibly feasible, where it’s got the right floor plate, in the right location,” he said. “It's just going to take a lot of help in order to make them make sense.”

Many cities in recent years have launched efforts to offer tax incentives for office conversions, fast-track zoning and permitting requirements, and put up money for improvements.  

 “I think that there's a role for government in that space,” International Downtown Association Chair Kris Larson said at the NAREE conference. 

The city of Sugar Land, Texas, just southwest of Houston, is pouring millions of dollars into the redevelopment of a 53-acre office campus, which Fluor Corp. left in 2023. Houston-based Lovett Group is building out the area into a pedestrian-friendly housing community with parks.

The city says it will spend $7M to support amenities like parkland and civic spaces, and it plans to reimburse up to $12M for public infrastructure and up to $5.3M for demolition and environmental remediation at the site.

Washington, D.C., last year launched a 20-year tax abatement for office-to-residential conversions in part of downtown as long as developers include 10% of their units as affordable housing.

At the beginning of this year, D.C. expanded its efforts with the Office to Anything program, a 15-year tax freeze for office buildings being converted to other uses besides residential, such as hotel, entertainment or retail uses.

New York earlier this year implemented the 467-m program, under which developers can receive various levels of tax abatements for different time periods provided that at least 25% of the units are affordable.

Massachusetts launched a program in March 2024 to assist municipalities in identifying the best candidates for conversion while lowering regulatory barriers and allocating funds for technical assistance. Boston in 2023 rolled out a payment-in-lieu-of-taxes incentive for developers to receive a tax reduction on office-to-housing conversions.

In 2022. Chicago issued an invitation for proposals to offer city assistance for conversion projects in the LaSalle Street corridor. As of May, six adaptive reuse proposals totaling 1,765 units had been approved for $321M in tax increment financing support, according to the state's website.

The first 117-unit development from that program got underway in March.

IDA's Larson said communities have historically used tax increment financing tools when it comes to blighted properties to stop the distress from bleeding into the surrounding areas.

“When we look at the genesis for a lot of our local mechanisms to facilitate economic development, they're around that notion of blight remediation, because blight creates a sprawling effect on real estate around it,” he said. 

Larson pointed to Calgary as a city that took an especially heavy hand in fueling conversions, as leaders realized what falling office values could do to the city's tax base. 

Calgary offers cash incentives for office conversions that total about 25% to 30% of construction costs, and it allows for a shortened approval process. 

An Urban Land Institute post from last year called Calgary’s incentive program “one of the most successful office-to-residential conversion programs in North America.”

“And so rather than experience that erosion, they basically preempted that and subsidized the conversion of those dying towers into residential because they wanted to solve two problems at once,” Larson said.

Even as cities are ramping up efforts to ease the barriers and subsidize conversions, Granite Properties' Fuller said the success of downtown revitalization efforts may ultimately require local jurisdictions to take larger measures to get the ball rolling.

“Some cities are going to have to buy these buildings and/or these sites and then do a public-private partnership in order to make them make sense,” Fuller said. “Not many developers go out there with the intent to lose money.”

Two major developers in D.C., a city with a large stock of old office buildings that have become vacant, called on the local government earlier this month to go beyond tax incentives and acquire obsolete properties. 

Hines Senior Managing Director Andrew McGeorge, speaking at Bisnow's D.C. State of the Market event, said vacant office buildings that developers can't convert should be demolished by the city to create new downtown parks. 

PRP Real Assets Chief Investment Officer Jon McAvoy said the economics don't make sense for many investors to acquire and rehabilitate these older office buildings, so the city should buy them to use the properties for public services. 

"Everyone complains we don’t have enough schools, we don’t have better schools and we don’t have places for our kids to play sports," he said. "Well, now is the opportunity for the city to step up and retake some of this land and do something productive with it. So I would love to see that happen."  

CORRECTION, JUNE 30, 10:40 A.M. ET: A previous version of this story misstated some of the context regarding the Fluor Corp. campus redevelopment. It has been updated.