The COVID-19 pandemic fundamentally altered the dynamics of urban commercial real estate, leaving many North American downtowns grappling with high office vacancy rates and underutilized buildings. In response, city governments across the continent have launched incentive programs to encourage the conversion of obsolete office properties into much-needed residential housing. But do these programs actually work?
A recent study of office-to-residential conversion initiatives in New York City, Washington, D.C., Calgary, and Chicago concluded that well-designed, substantial upfront incentives I the form of capital were significantly more effective at making conversions financially viable than longer term tax abatement programs. This conclusion offers valuable insights for policymakers, developers, and economic development professionals on how to craft policies that will spur redevelopment in our treasured downtowns.
The Rationale for Office-to-Residential Incentives
As remote and hybrid work arrangements persist, demand for traditional office space has declined, while the need for urban housing remains acute. Converting offices to residences presents a logical solution, but the economics are challenging. High acquisition costs, complex and costly construction, regulatory hurdles, and tough financial markets have rendered many projects infeasible without government support. Recognizing this, cities have crafted incentive programs—ranging from tax abatements to upfront grants—to catalyze private investment in conversions.
Methodology: A Comparative Case Study Approach
To assess the effectiveness of these incentive programs, Packard Beasley Consulting conducted a study analyzing one subject property in each of four different cities, modeling projected returns with and without the respective incentives. The key metric was levered Internal Rate of Return (IRR), with a minimum required threshold of 15–20%—a standard benchmark for attracting private capital to redevelopment projects.
New York City: The Affordable Housing from Commercial Conversions Tax Incentive Benefits Program (AHCC), enacted in April 2024, offers a 100% property tax abatement during construction and a variable post-construction abatement, contingent on location and timing. Projects must reserve at least 25% of units as affordable, with strict income banding and rent stabilization requirements.
Washington, D.C.: The Housing in Downtown Program (HID), effective March 2024, provides a 20-year tax abatement post-construction. Affordability requirements are less stringent than New York’s, with either 10% of units affordable at 60% of Median Family Income (MFI) or 18% at 80% MFI, maintained only for the duration of the abatement.
Calgary: The Downtown Calgary Development Incentive Program, relaunched in late 2024, grants $75 per square foot of converted space (up to $15 million per property) as an upfront subsidy. The program was temporarily paused due to overwhelming demand, then reopened with additional federal funding.
Chicago: The LaSalle Street Reimagined Program leverages Tax Increment Financing (TIF), awarding upfront capital based on project need and adherence to affordability targets. Approved projects must allocate at least 30% of units as affordable, averaging 60% of Area Median Income (AMI).
Case Study Properties
Upfront Capital vs. Tax Abatements
The analysis revealed a clear pattern: programs offering substantial upfront capital (Calgary and Chicago) were significantly more effective at making conversions financially viable. Both cities’ subject properties achieved levered IRRs within or above the 15–20% threshold, indicating that the incentives were sufficient to spur investment that would not otherwise occur.
Chicago’s upfront TIF capital support raised projected IRR above the minimum threshold, and Calgary’s grant program similarly elevated returns.
In contrast, New York City and Washington, D.C.’s tax abatement programs did not provide enough of a boost. Even after accounting for incentives, projected IRRs for these projects remained below 8%. The long-term nature of tax abatements failed to offset high upfront costs and financing challenges, especially in markets with elevated acquisition prices or construction costs.
Affordability Requirements and Market Dynamics
Affordability mandates were not the primary barrier to feasibility; rather, the structure and timing of incentives played a influential role. In New York, strict affordability rules and perpetual rent stabilization added complexity, but the main limiting factor was the lack of upfront financial support. In D.C., high acquisition costs and less generous incentives left returns below the investable threshold.
The wave of office-to-residential conversions represents a unique opportunity to revitalize downtowns, address housing shortages, and reposition urban economies for a post-pandemic future. This comparative analysis demonstrates that well-designed, upfront incentive programs are essential to unlocking these benefits. Cities that invest in targeted, substantial subsidies will be best positioned to attract private capital, deliver affordable housing, and transform underutilized office stock into vibrant, mixed-use communities. As economic development leaders consider their own strategies, the experiences of Chicago and Calgary offer a compelling blueprint for success.
Corinne Packard Beasley, ESI Senior Advisor and Professor at Georgetown University
Corinne Packard Beasley is a senior advisor to ESI, President of Packard Beasley Consulting, as well as an Assistant Professor of Real Estate at Georgetown University. She previously served as a director at ESI, in addition to serving a former vice president of development at the Hudson Yards Development Corporation (HYDC).
