2C — July 2023 — Owners, Developers & Managers — M id A tlantic Real Estate Journal
www.marej.com
O wners , D evelopers & M anagers
By Michael Cunningham, Rittenhouse Appraisals Addressing office to residential conversion challenges in Philadelphia
E
very citizen of Phila- delphia and the sur- rounding area under-
economic uncertainty and higher interest rates, decreas- ing the value of commercial real estate citywide. A way to mitigate these cur- rent 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, com- mercial real estate profes- sionals said local zoning and permitting are the biggest challenges and main obstacles to converting office space into
other uses. The affordable housing cri- sis 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 de- velopment 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 Hous- ing 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 de- velopment even more econom- ically unfeasible. Addressing the long-standing, restrictive policies and creating avenues
to modify and simplify of- fice to residential building conversions will allow more Philadelphia residents to have affordable housing. Remote work has trans- formed the Philadelphia of- fice market in profound ways, although in comparison to other major cities Philadel- phia 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 eco- nomic activity in the Center Business District and for office building owners, plung - ing rental revenue. For City government increased va- cancies in offices has meant fewer real estate transactions and transfer taxes, decreas- ing market values and even- tually declining real estate tax revenues from commer- cial office properties. There are many challenges with office to residential conversions since not all of- fice buildings have suitable infrastructure and functional layouts. It is important for City leaders to realize that maximizing the economic fea- sibility 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 resi- dential building conversions will require public and pri- vate 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 success- ful plan to support office to residential conversions, however, will allow City resi- dents 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 Rit- tenhouse Appraisals. MAREJ
stands that the City fac- es numerous challenges. With respect to commer- cial real es- tate, how- ever, there are three: a sustained af-
Michael Cunningham
fordable housing crisis, the persistence of work from home trends reducing de- mand for office space, and
Commercial Real Estate Serving the Greater Delaware Valley Appraisers
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