The telecommuting trend sparked by the pandemic has depressed demand for downtown office space in Chicago and other cities. In response to this trend’s negative impact on urban centers, the Revitalizing Downtowns Act was introduced in Congress last summer, with the goal of converting unused or outdated office buildings into residential or mixed-use space in an attempt to revive downtown commerce and vitality. If passed, the legislation would amend the Internal Revenue Code to incentivize developers and building owners to transition outdated buildings in city centers from empty office or retail space to housing or mixed-use properties. Here’s a closer look at how developers and downtown property owners could benefit if the bill were to become law.
The pandemic has led to more people working from home, at least part of the time, causing many employers to either close or downsize their physical office space. In Chicago, a historically high 96.3 million square feet of office space – about 18.8 percent of total inventory – was available at the end of 2021, according to the Chicago EOY 2021 Office Real Estate Report, which was published by Cawley Chicago in February 2022. This represents an increase of about 13 million square feet versus Q1 2020, according to the report. Other downtown markets are experiencing similarly elevated office occupancy rates. Fewer companies and employees in downtown areas means lower tax bases for cities and fewer customers for restaurants and other service businesses that rely on office workers for revenue. At the same time, many downtown areas struggle with ongoing deficits in the amount of affordable housing available relative to demand. Chicago has about 120,000 fewer units of affordable housing than what is needed, Department of Housing Commissioner Marisa Novara stated last year. The Revitalizing Downtowns Act would address both issues.
Revitalizing Downtowns Act
Democratic Senators Debbie Stabenow and Gary Peters, both of Michigan, introduced the Revitalizing Downtowns Act in the Senate on July 28, 2021, and it has been assigned to the Committee on Finance for review. A companion bill in the House has been referred to the Committee on Ways and Means. The goal of the legislation is to incentivize the conversion of office buildings that are at least 25 years old to residential or mixed-use spaces, with at least 20 percent of the residences dedicated to affordable housing. For projects meeting the criteria, 20 percent of the cost of the conversion would be covered by a tax credit.
Potential Impact on Downtowns
The Act is supported by a coalition of 37 national and regional economic development organizations, including chambers of commerce, downtown alliances, and others, who see many potential benefits for urban centers. Proponents say redevelopment would bring more people downtown to sustain the local communities and business districts, while the addition of downtown housing – including units designated as affordable – would add much-needed supply to put downward pressure on prices that are pushing low- to moderate-income people out of many urban areas.
Considerations for Developers
Given the limited space in downtown areas available for development, the Act would provide new opportunities for developers to convert under-utilized properties to a higher and better use. The tax incentives would offset the high costs associated with converting office space to residential space, thus making projects more economically viable and lowering developers’ financial risk.
However, while the Act has garnered a coalition of support across the country, its future is uncertain, given the slow pace of legislation in Congress. It is also unclear whether developers and others could use the tax credit in conjunction with existing federal project-based incentives, such as the Low-Income Housing Tax Credit or Federal Historic Preservation Tax Credit programs, to maximize their benefits. In addition, when taking advantage of any tax benefits from the Act, developers would still have to comply with local zoning restrictions, which could impede redevelopment projects in some locations.
Real estate developers, building owners, and other real estate companies that are considering opportunities or transactions which could be impacted by the passage of the Revitalizing Downtowns Act should consult a trusted attorney about the potential benefits of the Act, as well as any financial and legal risks involved.