Downtown Boston housing revival: Empty office space to be converted into apartments

A developer looking to place 15 housing units above a Mediterranean grill and shoe repair shop downtown will be seeking approval from the city’s planning agency next month.

This is the first application up for consideration under a pilot program aimed at converting vacant office space into residential use, primarily in and around downtown.

The Boston Planning & Development Agency is scheduled to vote on the proposal from Boston Pinnacle Properties in March, jumpstarting the “Downtown Residential Conversion Incentive Pilot Program,” an agency spokesperson told the Herald this week.

Boston Pinnacle Properties is calling for 15 residential apartment units — 10 studios and 5 one-bedrooms — across four floors above Mediterranean Grill Boston and Dave’s Instant Shoe Repair at 281 Franklin St., in the Financial District.

If approved, construction is slated to start this spring at the 1878 brick and sandstone mercantile Henry Gustavus Dorr Building. Three of the units would be income restricted, meeting a key requirement in the program that 20% of units match what officials consider “inclusionary zoning.”

The total scope of the work is expected to cost nearly $1.6 million, attorney George Morancy wrote in the application, adding the project is “fully compliant with the requirements of the Boston Zoning Code.”

In total, the BPDA has received four applications since October that would create 170 housing units by converting eight high vacancy Class B and C office buildings, according to officials. Candidates range from small local property owners to larger real estate brokers and developers, they said.

The largest project seeks 98 residential units out of three interconnected office buildings on Devonshire and Washington streets. The two others are calling for 24 units at 2 and 5 Longfellow Place and 33 units at 1 and 10 Emerson Place.

Applicants must meet inclusionary zoning requirements, green energy standards and start construction by October 2025. Applications are open until June.

“This proactive approach is one of the first in the nation,” a BPDA spokesperson said, “which is viewed as a win-win designed to (a) help transform underutilized office space into much needed housing downtown; (b) create a more vibrant urban core; and (c) help stabilize the office market.”

To facilitate the conversion of offices to residential buildings, the BPDA board last October approved a demonstration project plan area including Downtown/Financial District, Chinatown, the Bulfinch Triangle Historic District, the Leather District, and the Fort Point Channel Historic District.

The plan allows the BPDA to “develop, test and report methods and techniques and carry out demonstrations for the prevention and elimination of slums and urban blight.”

Mayor Michelle Wu’s administration last summer announced the initiative will offer a 75%, 29-year tax abatement to building owners who jump on the chance to convert. The discount is intended to offset the high cost associated with converting office space, which is designed and engineered differently, to residential uses.

The tax break “could provide a strong incentive to encourage conversion,” officials have said.

Post-pandemic vacancies downtown are running about 20%, according to a study released in the fall of 2022.

“It’s a win-win all around,” Wu said during an appearance last week on NBC10 Boston’s @ Issue. “We need more foot traffic to support the small businesses, it keeps the community vibrant and safe and exciting, and it’s also a time when there’s much less demand for downtown office buildings, given new ways of working and much more virtual and hybrid work.”

Projects would be facilitated by a public-private partnership between the city, the BPDA and the project proponent and would result in a Payment in Lieu of Taxes (PILOT) agreement for the property going ahead.

In order to recoup forgone tax payments, the city would also require a 2% payment from future sales of the property.

Vacant office buildings have painted a gloomy forecast for Boston’s financial wellbeing.

City Hall officials are downplaying a report issued last week that points to a $1-billion-plus budget gap brought on by Boston’s eroding commercial tax base in five years.

The report commissioned by the local think tank Boston Policy Institute in conjunction with The Center for Policy Analysis at Tufts University honed in on how the pandemic-era shift to hybrid and remote work has left office buildings largely vacant, leading to declining office values and commercial real estate prices.

The report projects the decline in office space values and commercial real estate prices will lower annual tax collections by roughly $500 million annually, starting in 2029, amounting to a 10% yearly revenue loss.

Nicholas Ariniello, the city’s commissioner of assessing, disputed the report’s findings and defended the budget’s reliance on property tax revenue.

“We have not seen any indications from the real estate market that would translate to a loss of revenue for the city,” Ariniello said in a statement. “Although we don’t feel that the current real estate environment is going to lead to budgetary concerns, it is something that we are keeping a close eye on.”

Wu’s initiative in Boston is just the latest in a push by mayors across the U.S. to revive flagging downtowns struck by post-pandemic workplace changes, especially the move to remote and hybrid working.

Similar efforts are playing out in New York, Washington DC, Chicago, San Francisco, and Philadelphia, among others.

Some in the real estate industry, however, view conversions as a “very tall order.” That’s how Scott Kelley, founder and CEO of Aetos Capital Real Estate, described the endeavor in an interview on Bloomberg Radio this week.

Lights, access and elevators present “big issues” while floorplates in office buildings often don’t align with apartment layouts, said Kelley, head of the New York-based venture capital firm that focuses on investment opportunities in real estate markets.

“It’s not easy to do, and I think it’s really kind of overblown in terms of how big of an opportunity that is,” Kelley said. “The economics in terms of tax breaks, help in financing, governments are going to have to find a way to get these buildings viable, and it’s going to mean working with the private sector in a way that might appear to some to be too generous to the private sector.”

from Boston Herald https://ift.tt/3C5OMor