The city of Boston is taking steps to revitalize its downtown area and address the shortage of housing by launching a pilot program this fall. The program aims to convert underutilized office buildings into residential spaces and will offer substantial property tax breaks to developers who participate.

Converting office buildings into housing units can be a challenging and expensive endeavor due to the physical differences between the two types of spaces. However, this practice has gained traction in several major cities, often with public assistance in the form of incentives or tax breaks. The commercial office sector has struggled since the COVID-19 pandemic, while housing costs continue to rise, making such conversions an attractive option.

Arthur Jemison, director of the Boston Planning and Development Agency, expressed the city’s intention to partner with lenders, property owners, downtown stakeholders, and the state to increase housing production in the downtown core. The program aims to incentivize developers by offering tax breaks that could significantly reduce property taxes for converted buildings. For example, a building valued at $10 million could see its annual tax bill drop from $246,800 as an office to as low as $26,850 as a residential dwelling.

The specific terms of the tax breaks will be determined on a project-by-project basis. Some buildings may pay lower tax rates immediately after conversion, with rates gradually increasing over a 29-year term. The city spokesperson mentioned that even a few conversions would have a meaningful impact on creating a vibrant, mixed-use neighborhood in downtown Boston.

The Financial District, along with Downtown Crossing, is the largest office submarket in the city but has been slower to return to pre-pandemic levels compared to other office-dense areas like Back Bay and the Seaport. The older, less-expensive class B and C office properties have struggled to attract tenants, with newer class A properties dominating the market. This makes the class B and C properties prime candidates for conversion into residential spaces.

A recent study by HR&A Advisors Inc., Utile Inc., and PM&C examined 445 buildings encompassing a combined 56.6 million square feet in the Financial District, North Station area, and Chinatown. The study resulted in discussions with groups of developers to explore conversion possibilities.

The exact number of qualifying buildings in Boston is yet to be determined, but the city expects to gain a better understanding once applications are received in the fall. The Wharf District and Ladder Blocks between Tremont Street and Washington are highlighted as potential conversion candidates.

David Greaney, a prominent downtown office owner and developer, expressed interest in the program and mentioned having productive conversations with the Boston Planning and Development Agency. His firm, Synergy Investments, owns more than 20 office buildings in Boston, primarily class B and C properties.

The housing production in Boston has experienced a slowdown, with new housing permits dropping by 50 percent in the first half of this year compared to the previous year. However, this decline is more aligned with the average permits issued in the first half of 2019-2021. Mayor Michelle Wu has been a proponent of increasing affordable housing, and any buildings converted under this program would need to comply with her proposed expanded affordable housing requirements, which are yet to be enacted.

The converted projects would also need to meet new energy efficiency code standards and are encouraged to maintain ground floors for retail or public use. The program is designed as a short-term solution, with applications being accepted from fall through June next year, and construction required to start by October 2025. There is no limit to the number of properties that can apply.

If developers decide to sell a converted building, the city would charge a 2 percent fee on the sale to recover forgone tax revenue. This fee is separate from the proposed 2 percent transfer tax on high-dollar real estate sales, intended to fund affordable housing, awaiting legislative approval.

Developers have expressed the need for government assistance to make office-to-residential conversions economically viable. Tamara Small, CEO of NAIOP Massachusetts, a commercial real estate industry association, commended the city’s move to offer incentives for such conversions.

While converting downtown offices to residential properties presents challenges due to the differences in infrastructure, a property tax incentive of up to 75 percent could motivate developers to pursue conversion projects they might not have considered previously. This program is seen as a valuable tool to stimulate housing production in Boston.