March 16, 2021

How Commercial Property Conversion Can Expand Housing Supply?

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Enterprise Community Partners recently released its policy priorities for 2021, which includes 47 steps that federal, state and local governments can take toward “making home and community places of pride, power and belonging”. Among these recommendations are several that seek to increase the supply of affordable housing though acquisitions of existing structures made available due to the pandemic--including newly vacant commercial and office spaces. 

Weakness in the commercial and office space market also provides a unique opportunity address some past injustices around land use and community access. These properties are often located in desirable communities with access to employment and transit options –indeed, some of these structures were built on formerly thriving communities that were razed under the guise of economic development. Repurposing these spaces for residential use thus can be an equitable solution to increasing the supply of affordable housing, especially in communities that oppose the development of new high-density housing. Working with potential residents on such efforts will further ensure beneficial outcomes for low-income communities of color traditionally marginalized in land use and development decisions.

Conversion of non-residential property into affordable housing is not without its challenges—including identifying feasible properties, aligning zoning and building codes to permit retrofits, and securing local community support for this work. In this post, we describe some recent examples of repurposed spaces successfully overcoming these obstacles and offer suggestions for bringing similar efforts to scale. We also discuss options for financing through existing public programs, leveraging private capital to expand the reach, and targeting allocations to prioritized needs and opportunities.

Using Hotels to Prevent Homelessness

Local governments have often turned to motel and hotel rooms as a resource for sheltering people with no other options, though these arrangements have generally been one-off, short-term and as-funding-allows situations. During the pandemic, however, the urgency of finding longer-term, stable, and affordable housing options for people experiencing or at risk of homelessness required new thinking about how to provide this necessary virus-containment resource.

Enter California’s Department of Housing and Community Development, which developed Project Homekey to purchase and rehabilitate existing vacant commercial lodgings – such as former motels, hotels, dormitories, and assisted living facilities – into permanent affordable housing. The program provided $800 million to city and county governments that were able to identify and secure properties quickly, with over 6,000 new units of affordable housing expected to come out of the effort. 

Enterprise Community Partners supported Project Homekey by, among other efforts, securing and distributing an additional $46 million in private philanthropic funding from Kaiser Permanente, Blue Shield of California, and the Chan Zuckerberg Initiative for operational and supportive services at Homekey properties.

Turning a Mall into A Village

While converting existing lodgings into small apartments for people experiencing homelessness meets a specific need with a similarly specific resource, the opportunity to retrofit commercial buildings for residential use has much broader potential when applied not just to small properties, but rather to large-scale shopping centers, like malls and big-box stores. The locations of many such properties in the suburbs not only offers a means to add affordable units where they are most lacking, but also to increase access to more desirable communities for low-income households traditionally shut out of such neighborhoods.

Suburban retrofitting,” a term coined by June Williamson and Ellen Dunham-Jones to describe the repurposing of underused structures to meet new needs, can offer a solution to more than just a shortage of affordable housing. As Williamson and Dunham-Jones see it, many of the malls, stores, and office parks dotting the suburban landscape were designed to meet the needs of large families living car-dependent lifestyles. Now many of those people are empty nesters looking for a smaller, more affordable space with walkable amenities.

One example of this kind of retrofitting is the Alderwood Mall in the Seattle suburb of Lynnwood, WA, which combines apartments with commercial and community space to attract residents looking for an alternative to the mostly single-family houses available in town. As a low- to middle-income community home to many blue-collar and service workers, the repurposed mall will also offer a more affordable option, along with a planned transit line that will increase car-free options.

Rezoning to Meet Residential Needs

To be sure, any conversion of non-residential space into housing will have its legal and regulatory complexities, especially where zoning may prohibit such a change. Some states and local governments are looking into options to lower this barrier, however, and facilitate new and reused developments in new locations. 

A recent study from the Terner Center at the University of California at Berkeley looked at just how much zoning inhibits repurposing of commercial spaces for residential use in California’s four largest metro areas – Los Angeles, San Francisco Bay Area, San Diego, and Sacramento. The study found that over 40% of commercially-zoned land in these metro areas prohibited non-commercial uses, preventing potentially thousands of crucially-needed housing units from being created. It also notes that more commercially-zoned land exists in the suburbs of these metros (relative to the cities), where housing shortages are especially acute and demand for more affordable options is high. 

A pair of bills are pending in the California legislature to facilitate rezoning and permitting of residential structures on commercially-zoned land. Concerns about environmental impacts, lost tax revenue, and community oppositions have already been raised against both, though sponsors are optimistic that the dire shortage of housing statewide will help prioritize these proposals, noting that it will take more than just zoning to fully overcome the state’s housing crisis.

Financing Residential Retrofits

Certainly mission-oriented developers and their partners are not the only ones considering the currently depressed values of commercial real estate, and some deep-pocketed investors may have the wherewithal to pursue a buy-and-hold strategy to capitalize on low prices and wait for the market to recover. To level the playing field, a range to financing tools should be made available to actors seeking to convert existing properties into affordable housing. However, while more traditional funding sources for production like the Housing Credit (potentially bundled with the New Markets Tax Credit for mixed-use retrofits) could potentially be used, the long timelines and site control needed for activation make them unlikely to be the right financing mechanisms. 

Instead, we need flexible funds that are easily deployed for acquisition and rehab, like the Stabilization Emergency Acquisition Fund (SAEF) that would provide funding for community development financial institutions (CDFIs) to flow capital to mission-oriented developers. The scale of financing conceived for SAEF is feasible for acquisition and retrofit of individual properties like office buildings and hotels, but to facilitate the large-scale conversions of shopping malls to mixed-use, mixed-income communities, mission-oriented actors could form joint ventures with other developers. 

In short, developing and deploying the right financial tools quickly is a critical component for taking advantage of what may only be a narrow window of opportunity to gain access to properties that can support the twin objectives of expanding the supply of affordable housing and advancing racial equity.

Stay up to date with the latest information on opportunities to increase the supply of affordable housing through our blog posts and by signing up to receive our Today In Housing and Capitol Express e-mail newsletters.  

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