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Addressing office to residential conversion challenges in Philadelphia

By Michael Cunningham, Rittenhouse Appraisals


Every citizen of Philadelphia and the surrounding area understands that the City faces numerous challenges. With respect to commercial real estate, however, there are three: a sustained affordable housing crisis, the persistence of work from home trends reducing demand for office space, and economic uncertainty and higher interest rates, decreasing the value of commercial real estate citywide.

A way to mitigate these current and unfortunate trends while strengthening the City for the long term would be the establishment of policies that support office to residential building conversions. Per a recent report from the U.S. Chamber of Commerce, commercial real estate professionals said local zoning and permitting are the biggest challenges and main obstacles to converting office space into other uses.

The affordable housing crisis that Philadelphia faces is a result of systemic policies that have limited housing production and contributed to racial segregation, forcing too many Philadelphia regional residents to pay roughly half of their earnings in housing costs. Many of these federal and state policies that have been in place for decades, as well as local policies which include restrictive zoning prohibiting multifamily development in roughly 70% of Philadelphia’s land, layers of red tape and high construction costs. The situation is expected to get worse, as over 20% of Philadelphia’s affordable housing complexes that rely on the federal Low-Income Housing Tax Credit and Section 8 subsidies are scheduled to expire over the next 10 years, per the National Housing Preservation Database.

Increases in interest rates over the past nine months have only made residential development even more economically unfeasible. Addressing the long-standing, restrictive policies and creating avenues to modify and simplify office to residential building conversions will allow more Philadelphia residents to have affordable housing.

Remote work has transformed the Philadelphia office market in profound ways, although in comparison to other major cities Philadelphia occupancy rates are stronger than most. However the implications of this shift to remote work is being felt by the City in the form of reduced commuting on public transportation, reduced economic activity in the Center Business District and for office building owners, plunging rental revenue. For City government increased vacancies in offices has meant fewer real estate transactions and transfer taxes, decreasing market values and eventually declining real estate tax revenues from commercial office properties.

There are many challenges with office to residential conversions since not all office buildings have suitable infrastructure and functional layouts. It is important for City leaders to realize that maximizing the economic feasibility of office to residential conversions as standalone projects is the best way to ensure that Philadelphia maximizes its housing stock, strengthens its future tax revenue base and preserves the City’s economic vitality.

Embracing office to residential building conversions will require public and private partnerships that allow all stakeholders to achieve their goals, a significant amount of flexibility, and creative thinking but that will result in a stronger tax base long term. A successful plan to support office to residential conversions, however, will allow City residents to continue to support and enjoy the many shared amenities that enrich our civic life and pay our bills. By implementing a suite of policies to support office to residential conversions, Philadelphia can embrace a first mover advantage that conserves precious resources and demonstrates that its leaders have the foresight to plan long-term.

Michael Cunningham is a senior appraiser at Rittenhouse Appraisals.

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