Converting empty offices into apartments is good for the environment, but Philly’s buildings make it tough

Office buildings are a surprisingly environmentally unfriendly corner of our economy. Consider all the energy needed to heat and cool these giant structures, which often sit empty for hours and days on end. That’s never been more true than now, since some office buildings have been permanently hollowed out by remote work.

New York University’s Arpit Gupta and Columbia University’s Stijn Van Nieuwerburgh — who came up with the concept of the “urban doom loop” — believe converting vacancy-riddled offices to apartments not only makes sense from a business perspective, but would also be environmentally friendly. Gupta and Van Nieuwerburgh penned a paper with Candy Martinez, also of Columbia, to target where and how these conversions could be accomplished. (Spoiler: Philadelphia does not rank high on their list.)

The Inquirer interviewed Gupta about the study’s findings and how President Joe Biden’s Inflation Reduction Act could subsidize office conversions to affordable housing including in cities like Philadelphia, where the financials don’t otherwise make sense.

The conversation has been edited for length and clarity.

The first thing to know is that cities are generally greener than more suburban or rural uses. The ability to concentrate is generally environmentally beneficial. However, a lot of the carbon emissions that come from cities do come from office buildings.

To respond to that, a number of different cities are imposing carbon taxes or other regulations to limit emissions. New York City has Local Law 97 that is going to impose fines on building owners that exceed emissions targets.

The biggest advantage to conversions rather than teardowns is savings in embodied carbon. That refers to the fact that when you already have a building in place, you have a lot of emissions contained in the steel and concrete. To do all that from scratch requires a whole new set of carbon emissions associated with construction.

The biggest reason for transforming the use of the building is the trend of remote work, which systematically lowers demand for office space. Lower quality, lower amenity, older office buildings are experiencing the greatest drop in demand. There’s a need to redeploy the asset towards something else.

Residential demand has remained strong, even as the demand for offices has dried up. All across the country, every large city is worrying about high rents. Creating new buildings helps alleviate that shortage of housing and helps address the other main problem, which is that the decline in office computing leaves cities with lower foot traffic. Less activity downtown has consequences for anyone selling goods and services in urban areas, and that decline in foot traffic also contributes to crime and urban disorder, which relies on eyes on the street to maintain prosocial behavior.

More residential uses help to attract more people into the city, which leads to more foot traffic and consumption. It also puts people physically close to other office towers. Commuting distance is a huge predictor of whether someone comes into the office, so conversion raises the possibility of bringing more people closer to their place of work. Then office occupancy can go up a little faster.

First, we tried to figure out whether buildings are physically suitable for conversion and then whether the financials really make sense.

Physical suitability has to do with attributes like building age and layout. We took into account other factors, including building occupancy, because you don’t want to convert a building that’s fully occupied. You want to concentrate these activities on buildings that are already experiencing a decline in tenants.

That exercise identifies something like 10% to 15% of office buildings in the U.S. that are potentially candidates for conversion. Then we asked if it made financial sense for someone to convert the building. Here, we find that maybe 5% of buildings are financially viable for conversions. That second number can be nudged if cities provide additional funding, tax credits, or other things to increase the financial viability of conversions.

The bulk of our candidate offices were concentrated in cities like New York, San Francisco just because that’s where the greatest concentration of offices already are. These are markets that have the most office buildings. We found something like 41 candidates in Philadelphia’s metropolitan area, by contrast.

We do know for Philadelphia the real estate market is softer than it is for some of these other cities. Rents are just lower. That’s going to be a challenge for conversions.

There are a number of provisions in the Inflation Reduction Act that can be used to help further conversions. The largest is the $27 billion in the EPA’s Greenhouse Gas Reduction Fund, which offers competitive grants in three different areas that are intended to address greenhouse gas emissions, as well as simultaneously addressing climate justice needs for lower-income communities. There’s a big pot of money for projects that are engaged in energy efficient uses — and it has to get out the door by September 2024.

Most recently, the federal government has provided additional guidance on how this money can be spent, emphasizing that conversions are a potential use for this pot of money. So basically, these are grant programs that can be applied for by entities that are hoping to do conversions that incorporate emission reduction and some component of affordable housing to further climate justice programs. There are other programs through the Inflation Reduction Act as well, additional tax credits and supports.