National Housing Market Outlook

New Federal Program Seeks to Jump-Start Office-to-Residential Conversions

Eli Gilbert

January 26, 2024

$45B is now available across new and existing programs.

The Biden administration recently announced a multiagency strategy to address two significant woes plaguing the built environment: skyrocketing office vacancy and a structural undersupply of housing.

Their new guidebook outlines federal programs, loans, grants, and tax incentives that support the conversion of commercial spaces into housing. These resources, offered by departments like HUD, DOT, and the GSA, aim to finance and incentivize these conversions, making housing development more feasible and cost-effective in today’s environment of high interest rates and declining office values.

The Commercial to Residential Federal Resources Guidebook provides specific program details and case studies on deployed resources. The guidebook features real success stories where federal funds (HUD grants and rehabilitation credits) have been used to convert commercial spaces into housing across the US.

The following programs are now available for developers and municipalities to provide funding to offset the significant conversion cost discussed in our recent BMI and to help minimize red tape and speed conversions nationwide.

A few standout opportunities in the guide include HUD’s Community Development Block Grants, DOT’s below-market loan programs, and initiatives that allow the transfer of properties at no cost for affordable housing development.

Additionally, the administration will soon offer training programs for governments, developers, and lenders to address how best to use this suite of programs to fast-track conversions and create much-needed housing.

Concerned about the multifamily pipeline?

Thanks to a decade of low interest rates and favorable demand metrics, multifamily completions have risen since the pandemic. According to the latest U.S. Census data, multifamily completions are up +20% YOY in 2023, creating what many believe is a supply glut for new apartments.

However, most US markets are working through this peak period of new deliveries as the credit markets stay seized up, and the tide is beginning to turn. New multifamily starts have dipped -1% YOY. New apartment starts will drop by -27% in 2024 and a further -5% in 2025—to roughly half of current levels.¹

This slowdown in construction and growing demand for housing will likely produce a gap in the market for new units in the coming years. An increase in office-to-residential conversion projects could help fill this gap. The federal programs to buoy conversion activity have come at a perfect time.

Getting the underwriting right

Underwriting can be incredibly challenging once a potential property for office-to-residential conversion has been selected. Today, insight into the post-delivery performance of projects at the hyper-local level (defined as the micro-market, competitive market area, or even within a few blocks of the potential site) is even more critical, given how nuanced and fluid residential demand and pricing metrics can be.

Little of the conversion dialogue has broached the subject of the market data required to make informed decisions about the sizing, lease-up, and revenue projections of new residential units. By leveraging over 20 years of expertise and our sophisticated demand models, JBREC has worked with owners, developers, and municipalities nationwide to understand this data, which should be a fundamental component of any conversion review.

Is there a distinct lack of 1-bedroom or efficiency units in the market the project could meet? Are apartments with upscale, hotel-like amenities driving up rents in a neighborhood? How quickly can a buyer expect to stabilize a multifamily project after construction is completed? How deep is the rental pool for Class A multifamily within a 3-block radius?

Our Consulting team can inform the conversion process as early as the design phase by providing unit mixes and sizes most needed by the market. We can also forecast rent and absorption metrics. Reach out for assistance in navigating the dynamic trends of your specific market.

¹ Source: U.S. Census Bureau, Data: Jul-23, Pub: Sep-23

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About The Author

Eli Gilbert
Vice President, Consulting

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