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Vacant office building conversions may become the next frontier in residential real estate.
More office buildings, particularly in suburban areas, are expected to be vacated over the next couple years as businesses continue to sort out how much space they need with pandemic-induced hybrid work models, a new commentary from The Boulos Company, a Portland-based real estate firm, said.
The amount of office space required nationally and in Maine will drop in the coming years, especially in older and outdated office buildings, Nate Stevens, a partner and broker at Boulos, said. He said one solution is to “adaptively reuse vacant office buildings for residential purposes.”
“While this isn’t necessarily a new trend, there is now a greater need for housing and more office vacancy, and these conversions are needed on a greater scale,” he said.
One building already slated for residential conversion by Redfern Properties is located at 45 Forest Ave. in Portland. The former New England Telephone building will be turned into a mix of 81 market-rate and affordable apartments.
It still is not clear how many buildings may end up vacant because the impact of COVID-19 on the office market has yet to be fully felt, Katie Allen, a broker with The Dunham Group, told attendees at the MEREDA real estate conference last week.
Businesses are still figuring out their back-to-work plans. Some tenants with lease expirations in 2021 or later whose employees could work from home have chosen to abandon their space, she said. Others are opting for very short-term renewals or subleases.
Stevens said a significant increase in sublease space over the last 18 months is concentrated in suburban buildings, and could be seen as a precursor for the building’s vacancy.
But office buildings are difficult and expensive to convert because of their layouts. To help make them more affordable, The Revitalizing Downtowns Act was introduced in Congress last summer to expand the investment tax credit, as was the Qualified Office Conversion Tax Credit.
The tax credit would cover 20 percent of the cost of conversion of a property located in a central business district that had been used as an office building for 25 years. Some 20 percent of the residences in the converted building would have to be affordable housing.
The proposal could create more housing in downtown areas. It has been referred to the House Ways and Means Committee, but is far off from being signed into law.
Stevens said it is a good first step in the right direction because the conversation on housing and the effects of the pandemic on the office market have reached a national scale. If the tax credit is approved, local governments will need to enact local legislation enabling more office-to-residential conversions, he said.
It is difficult to predict the impact of the tax credit on Maine, because suburban areas will likely experience a higher vacancy rate over the next couple of years than downtowns like Portland. The office vacancy rates in southern Maine are well below the national average, but that could change.
“We will need to see more conversions sooner than later in our towns and cities to solve our immediate housing shortage and impending office vacancies,” Stevens said.