How States Can Design Effective Incentives to Spur Office-to-Residential Conversions

4 lessons to help ensure that states can achieve their goals

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How States Can Design Effective Incentives to Spur Office-to-Residential Conversions
Sam Lafoca Construction Photography/Avalon/Getty Images

The percentage of Americans working from home has quadrupled since 2019. One consequence of this change has been a historic decline in demand for office space—20% of offices were vacant in July 2024, the highest level on record. These vacancies could have significant consequences for local economies and government budgets, such as decreased real estate values, reduced business activity in downtown areas, and weak property tax revenue.

At the same time, cities and states are facing severe shortages of affordable housing. Lawmakers across the country are attempting to address these two issues simultaneously by enacting financial incentives—including tax exemptions, credits, loans, and direct grants—to help spur conversion of underused office space into residential units. Since 2020, at least 10 states have enacted such incentives. As more state governments consider this approach, they can rely on the large existing body of research—and four key lessons in particular—to help ensure that these incentives are effective, accountable, and fiscally sound:

1. States should set clear goals.

Policymakers cannot design incentive programs to achieve their goals unless they are clear on what those goals are and what type or types of housing they aim to encourage. Clear goals also help evaluators determine whether the active program is achieving its intended impact.

Office-to-residential conversion incentives can serve a range of purposes. Many focus on increasing the supply of affordable housing. New York State, for example, enacted a property tax exemption for conversions that set aside a percentage of apartments for affordable housing. Wisconsin, meanwhile, established a revolving loan fund in 2023 for conversion projects that create new workforce or senior housing.

Conversion programs are sometimes one component of a larger program with different goals. Ohio’s Historic Preservation Tax Credit, for instance, mainly aims to redevelop underused historic properties and has been used to convert historic office buildings into apartments. The state also has a Transformational Mixed-Use Development Program that provides a tax credit for creating mixed-use buildings that have an economic impact on their surrounding areas, which has been applied to housing conversion projects.

2. Programs should be evaluated.

More than two-thirds of states have processes to evaluate their tax incentives so that policymakers have objective information about outcomes. These evaluations provide a wealth of information, including whether the state is administering incentive programs efficiently, how much the programs cost, and whether they are effectively achieving their goals. States with an existing evaluation process should apply it to all newly created incentives. States without a process should consider implementing one so that they can measure program success.  

For example, Washington has a long-standing and effective evaluation process. In March 2024, the state passed a sales-and-use tax deferral for projects that convert commercial property into affordable housing in targeted areas. The legislation includes a provision that requires the state’s Joint Legislative Audit and Review Committee to evaluate whether the number of affordable housing units increased because of the program. If not, the law states that the Legislature intends to repeal the incentive.

3. Fiscal protections are important.

In some cases, the costs of incentives have increased quickly and unexpectedly, straining state budgets. Lawmakers should design incentives with fiscal protections to ensure that costs do not become unaffordable.

Caps—annual limits on program and project costs—are one of the strongest protections. Ohio limited its Transformational Mixed-Use program to $100 million in tax credits per fiscal year and $40 million per project.

Funding incentive programs through budget appropriations is another way to set a cap. California’s Infill Infrastructure Grant Program awards grants on a competitive basis for conversion projects. The state’s Budget Act of 2019 allocated $400 million for the grant, with $105 million distributed in fiscal year 2023 and the rest in fiscal 2024. This allows the state to precisely predict what the program will cost and when.

Lawmakers can also link incentives to the recipients’ performance, avoiding a worst-case scenario in which incentives prove expensive and fail to achieve their goals. Companies receiving Ohio’s Transformational Mixed-Use Development tax credit do not receive the credit until after they complete their projects. California’s Infill Infrastructure grant links incentives to performance through a “clawback” provision. Recipients must either demonstrate to the state’s Department of Housing and Community Development that the projects are moving according to the promised timeline or pay back a share of grant funds proportional to the housing units that have not been built.

4. Financial incentives are not the only option.

Research shows that alternative strategies that provide businesses with information, technical help, or assistance navigating regulations often provide a stronger return on investment than financial incentives alone and can be used on their own or in combination with incentives.

In Massachusetts, for instance, developers can apply for technical assistance from the state’s Commercial Conversion Initiative. The program supports housing conversions by conducting floor plan and feasibility analyses for suitable buildings and helping to lower regulatory barriers. This program aims to simultaneously address the state’s housing shortage and revitalize its downtown areas.

States can also help spur office-to-residential conversions through planning and zoning laws. For example, Rhode Island amended its zoning and planning laws to allow commercial-to-residential conversions (except where they violate state or federal environmental restrictions), remove parking requirements, and enable higher-density development. Likewise, Florida’s Live Local Act combined tax incentives with provisions exempting affordable housing projects from certain planning and zoning rules. Removing these restrictions makes the approval process faster, which in turn increases housing supply and decreases development costs.

States have moved swiftly to adopt conversion incentives over the past two years, hoping both to prevent office vacancies from triggering urban decline and to create much-needed housing. As more states embrace conversions, however, they should heed established research on how to design effective incentives. Some are already following these lessons, providing potential models for others.

Elizabeth Gray researches economic development incentives with The Pew Charitable Trusts’ state fiscal health project.