Facing a housing crisis and a sluggish downtown economy, Portland City Council is aiming to incentivize developers to convert vacant office buildings into residential apartment complexes by waiving up to $3 million in fees and relaxing seismic requirements. On Wednesday, City Council unanimously passed two of what they say is just the beginning of an array of incentives to revitalize downtown and address the city’s housing shortage.

“This is not the solution to our homeless crisis—far from it,” Mayor Ted Wheeler said. “But this is an important tool that can be used to further our suite of responses to the homeless crisis while we also address the fundamental question of what makes an urban area successful in a post-Covid environment.”

Portland officials estimate the city is short at least 20,000 residential units needed to meet housing demand in the city. At the same time, a transition to remote and hybrid work since the 2020 COVID-19 pandemic has left many of Portland’s downtown office buildings vacant. According to city estimates, approximately 26 percent of offices in the city’s Central Business District were vacant in the final quarter of 2022 and that number is only expected to increase as companies end their leases or downsize their office space.

As the city aims to incentivize more housing development, lure Portlanders back downtown, and adjust to the long-lasting impacts of the pandemic, converting empty office space into housing has regularly been raised as a solution. Portland is certainly not the first city to propose the idea; an article on office conversion by Portland State University Center for Real Estate graduate student Garrett Runck notes that cities like Salt Lake City, New York, Dallas, and Washington DC have conversion plans in the works and, if anything, Portland has lagged behind other major cities when it comes to redeveloping its downtown space in the wake of the pandemic.

To incentivize developers, Portland will now allow office-to-residential building conversion projects to forgo System Development Charges—fees that developers must pay to offset the impact their project may have on city services, like sewer systems and nearby park maintenance. For example, developers must pay the city $6,639.20 per unit in a multi-family residential project to cover the additional demand on the sewer system and $2,894 per unit to account for any increased traffic demand or impact. The total System Development Charges can easily run up to $15,000 per unit for a project, according to local real estate developers.

The code change approved Wednesday also reclassifies the seismic requirements of office-to-housing conversions, relaxing the standards below what is expected of a newly-built residential building. City officials emphasized that the seismic requirements are still stringent enough to survive a moderate earthquake.

“The seismic improvement standard is aligned with other major cities in seismic areas and we are not sacrificing safety for development,” Portland Commissioner Carmen Rubio, who co-introduced the incentives with Wheeler, said Wednesday.

The city will waive up to $3 million in System Development Charges or the monetary equivalent of the cost of the project’s seismic retrofit, whichever is lesser. The incentives will be in place until 2027, and any developer converting a building must commit to preserving the residential units for at least 10 years. Per the ordinance, the city estimates there are less than 20 office buildings that are structurally feasible to convert into residential buildings.

A mix of real estate developers, affordable housing advocates, small business owners, and Portland’s most powerful business lobbying group spoke in support of the incentives Wednesday. 

“We know that this vote will only be part of the solution to Portland’s housing and homelessness crisis, but it’s an important opportunity to bring more desperately needed housing online,” said Cole Merkel, co-director for homeless service coalition HereTogether. “While these conversions won’t be strictly limited to affordable housing, we recognize that increasing the housing supply at all levels is critical to providing more housing for everyone in our community.”

Additional representatives from HereTogether urged the city to prioritize making the residential units in the redeveloped buildings affordable for Portlanders who are being priced out of the city’s expensive rental market. Landlords and developers, however, urged the city to further reduce the seismic retrofit requirements for the conversions in order to make the projects feasible at all.

According to downtown property owner Jim Atwood, a feasibility study on converting his property to align with current residential seismic standards showed that retrofitting the building would cost approximately twice as much as just tearing it down and starting from scratch. 

"The elephant in the room isn’t the System Development Charges, it’s the cost of the seismic upgrade,” Atwood told City Council. “If you really want to throw property owners and developers a bone to encourage housing… you should consider eliminating the requirement for the seismic upgrades.”

Converted office buildings would have lower seismic safety requirements compared to a new residential building in Portland, but would still be in line with residential seismic requirements in other major cities like San Francisco. According to Bureau of Development Services employee Amit Kumar, the converted buildings would sustain minimal damage during a moderate earthquake under the new seismic standards, but would not be as stable in the event of a major earthquake. In other words, if the Big One hits, residents of a converted office-to-residential building would be expected to leave the building following the quake because the building will have likely sustained some damage due to the severe earthquake.

“It is definitely an expensive proposition to do any kind of seismic upgrade compared to building a new building,” Kumar said. “But I think these older buildings have been proven earthquake after earthquake to be very dangerous buildings.”

Wheeler indicated that he was interested in further exploring other cost mitigation measures the city could take to reduce the expense of seismic retrofits.

Sarah Zahn, Chief Operating Officer for Portland-based development company Urban Development Partners, said that it’s unlikely developers will jump on converting downtown office buildings in the near future given the incentives and subsidies the city government is currently offering. Zahn noted that conversion projects are still risky—developers never truly know what a retrofitting project will entail until they’ve started construction, which can open them up to higher risks of construction delays and rising costs from unexpected challenges. Plus there are the additional challenges of turning an open floor plan office into apartments, complete with kitchens and bathrooms and reasonable amounts of light from windows.

By the time a conversion project is complete, local developers say that it’s unlikely they will be able to price the units below market rate.

“A lot of people look at this as a silver bullet to create more affordable housing, and I just think that, because of the economics of it, it's a challenge,” Zahn told the Mercury. “We all acknowledge we need more affordable housing, but it’s hard to hang our hat on this conversion equation, unless there is a tremendous amount of subsidy—well beyond the amount the city is putting in today for new construction of affordable housing.”

City officials are aware that there is still a long way to go before converting office buildings into apartments is a feasible economic investment for developers.

“The opportunity only makes sense if it pencils out, and that’s just the hardcore reality,” Wheeler said of the conversions. “We have to figure out the right balance between incentives, costs, regulations, and the cost of capital coming into these projects in order for it to be successful.”

Correction: A previous version of this story incorrectly stated that the seismic standards for converted office-to-residential buildings called for residents to leave the building before a severe earthquake. The seismic standards approved by City Council call for residents to exit the building after a severe earthquake due to potential damage.