DC Offers 20-year Tax Abatements for Office-to-Resi Projects

Washington DC is trying to jump-start office-to-residential conversions by offering a 20-year tax abatement as an incentive the city hopes will make it more feasible for building owners to pencil in adaptive reuse projects.

DC saw 1M SF of office space vacated in 2023, driving up the city’s vacancy rate to more than 21% at the end of the year, a new record.

The federal government has been a primary culprit in the cratering of the office market in Washington. The Feds are the city’s largest employer, with a huge portfolio of DC office space that the government owns and leases, but a large portion of that space isn’t being used.

According to a recent report from the Government Accountability Office, only a quarter of the federal headquarters space in DC is being occupied on a regular basis.

The new tax abatement incentive is being administered by the Office of the Deputy Mayor for Planning and Economic Development, which has been authorized by the City Council to approve abatements of up to $2.5M for each of the fiscal years 2024, 2025 and 2026.

The annual allocation for tax abatements for eligible property owners who convert all or part of their property to residential uses in specified downtown areas increases to $6.8M for fiscal year 2027; $41M for fiscal year 2028; and the equivalent of 104% of the prior year’s cap for each succeeding fiscal year after 2028, according to a notice published in the District of Columbia Register on Jan. 26.

Areas covered by the incentive include portions of Dupont Circle, West End, Foggy Bottom, Penn Quarter, Chinatown and East End.

Property owners participating in the program are required to make 10% of the new housing units affordable to families earning 60% of median household income or they can make 18% of the new units affordable to households earning 80% of the median income.

A working paper from the National Bureau of Economic Research recently concluded that DC is one of six of the 20 largest US metro markets that are conducive to financially feasible office-to-residential conversions.

According to the calculations in the paper, the metros in NYC, San Francisco, Washington DC, Boston, Denver and San Jose offer the best opportunities for office conversions with a positive outcome, financially.

The NBER paper was written by Arpit Gupta of NYU’s Stern School of Business and Stijn Van Nieuwerburgh and Candy Martinez of Columbia University’s Graduate School of Business. Gupta and Van Nieuwerburgh produced a jaw-dropping paper last year that projected a potential $500B drop in office valuations in the U.S. by the end of this decade as a result of remote work.

For the NYC, San Francisco and DC metros, the total number of buildings deemed financially feasible conversion targets by the NBER paper were 634, 358, 155, respectively. The totals for the Boston, Denver and San Jose markets were 73, 69 and 52, respectively.