D.C. Office Conversion Tax Credits Would Ease Housing Crisis

Washington, D.C.’s high office vacancy rate is prompting conversion to more than 5,800 apartments this year—more than any other city in the country.

The area also has the highest share of office buildings with bank loans at risk of defaulting, even surpassing San Francisco.

The city’s latest budget proposal, released earlier this month, contains incentives to address the vacant office buildings. These include $13 million in real property tax credits for office conversions, which will reduce real property tax revenues over the four-year financial plan.

However, there are many challenges to converting office buildings to residential units: physical, regulatory, and financial. But if all goes well, it would be a win-win situation for the D.C. government, building owners, retail and restaurant owners, employees, apartment renters, and the unhoused population.

The D.C. government conducted an assessment of residential conversions in 2020 and noted that building design, construction, and configuration are important considerations. Equally important is a building’s capacity to support a vertical addition—both structurally and to be in compliance with the maximum allowable zoning envelope.

The quality of an office building can impact the likelihood of conversion. The report found that the highest quality office buildings (4- and 5-star rankings) are the least likely candidates for conversion because their long-term revenue potential is higher if they remain office buildings.

Conversely, the lower-quality 3-star ranked buildings most likely will require recapitalization, which would make them prime targets for conversion. Obtaining financing might be challenging if the office building requires a significant capital investment for the conversion.

Couple this with the fact that long-term property values are significantly higher for office buildings compared with residential buildings. The potential impact of decreased returns on investment when they are ready to sell might dissuade some property owners from converting.

Another obstacle is that federal employees make up one-third of downtown D.C. workers—some of whom are still working remotely. As a result, office buildings are underutilized.

The federal government is sitting on some prime real estate that it plans to vacate, most notably the FBI headquarters, which takes up an entire block. The interplay between federal, local, and private ownership could impact conversions.

The financial impact of vacant office buildings is far-reaching and encompasses reduced revenue for retail and restaurants and sometimes closures and decreased sales tax revenue. It also includes decreased employment and income tax revenue, higher unemployment, and increased risk of bank loan defaults for owners of these vacant buildings.

At the same time, Washington faces an affordable housing and homelessness crisis. This is in large part due to the high rents and high home prices that make renting and home ownership impossible for many residents. Rents average more than $2,000 per month. And according to 2023 data from the Department of Housing and Urban Development, 73 out of every 10,000 people experienced homelessness.

But a decrease in property tax revenue could be offset against the expected increases in sales, income, property, and employment tax revenue from retailers, restaurants, and employees that should result from the $520 million budgeted for the Gallery Place Revitalization Fund. A significant portion of this fund will be used to upgrade the Capital One Arena—the home of the NBA’s Washington Wizards and NHL’s Washington Capitals. (The city was on the verge of losing the teams to Virginia in March.)

The Biden administration has pledged to provide significant financing resources and technical assistance to support office-to-residential conversions. And according to D.C. Mayor Muriel Bowser, plans are underway to have 15,000 new housing units downtown by 2027; 22 office-to-residential conversions are permitted or underway.

All these could result in a positive outcome for the D.C. and federal governments, business owners, and residents.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jean Wells is an attorney, CPA, and associate professor at Howard University School of Business.

Write for Us: Author Guidelines