Portland, like many U.S. metro areas, has an abundance of office vacancies and a shortage of housing. These issues are not news, but rather an obvious — and fixable — disconnect between two real estate market sectors. Thoughtful, intentional and responsible public-private partnership, with local and state legislative and executive support, can remedy these two problems at once.

First, consider the current manifestations of these two issues:

• Office vacancy in Portland’s central business district has rendered downtown a shadow of what it was in recent years. Portland’s office vacancy rate at the end of 2023 was approximately 30 percent; in 2018, the vacancy rate was closer to 7 percent. The current vacancy rate does not reflect the actual usage of leased office space; for example, a downtown building may be 70 percent leased, but only half of that leased space may actually be utilized by office workers on a regular basis. “Return to work” policies, both public and private, have struggled to gain traction due to the lack of critical mass that would make working in an urban center preferable to staying at home: without shops and restaurants, a central business district (CBD) can be uninviting to workers and dwellers, and without downtown dwellers and workers, restaurants and shops cannot survive.
• Housing availability and affordability are fundamental requirements for a thriving society. A flourishing city or region is built on reasonably proximate residential opportunities for multiple socio-economic groups. Though residential vacancy rates in the central business district have risen over the last year, the Portland-metro area has overall seen a tightening of residential vacancies – to the extent that folks are staying in the area, they are moving to the suburbs, where rents remain high, vacancies are low, and commutes are long. Reasonable minds may disagree about which policies will generate the most robust and measurable improvements to the current housing crisis, which is characterized by high rents and demand outside the city’s core relative to a dwindling demand (and flat rates) in the CBD. The basic concept of supply and demand cannot be ignored: increases in housing supply, particularly in the affordable sector and in the city’s urban core, will decrease housing costs and reduce barriers to entry into the central housing market. If blue-collar and white-collar workers, students and teachers, employees, and employers can (and want to) live more or less in the same zone, everybody benefits. If there is a fundamental housing shortage or a disconnect between where desirable and affordable housing is available and where the city’s thriving core should lie, this benefit cannot be realized.

How, then, can Portland (or any other U.S. metro area) flip the script and transform office vacancy from a problem to a solution? The fundamental barrier to an office-to-residential conversion is dollars and cents: the cost of conversion, which may include a substantial array of plumbing, seismic, and other facilities-related upgrades, is greater than the return on investment. No sane real estate developer can be expected to invest millions of dollars into a conversion without expecting a reasonable return. As an initial attempt to incentivize conversions, some measures have been offered to developers seeking to take on these projects. The city of Portland has offered partial exemption from system development charges. This program offers developers a relatively small break on public infrastructure costs, which would otherwise be triggered by the conversion. Additionally, the city of Portland will reduce seismic improvement standards otherwise applicable to converting office space to residential units.

But these measures are not enough to get developers in the game. Conversion projects still do not pencil out. If they did, we would see projects under way.

To create incentives that spur developers to take on office-to-residential conversion projects, state and local government officials need to work with developers to consider:

• expedited and fee-reduced permitting, with quality controlled by requiring participation by reputable architectural and engineering firms,
• property tax abatement,
• loan and grant programs to provide developers with the capital to pursue conversion projects, and
• programs to convert management of converted projects to government agency management after conversion completion.

If these suggestions sound like a handout to developers, please revisit the point of this opinion piece with me before drawing that conclusion: as things stand, Portland’s CBD has too much office space and not enough housing. As a result, our urban core has disintegrated. A vital, robust urban core produces immeasurable benefits to a metropolitan area. The government cannot address this on its own and therefore needs to create incentives – some of them financial – to induce developers to engage in public-private projects to revitalize our core and benefit the region.

Oregon was a national leader in land use law in the early 1970s, when we pioneered the concept of an urban growth boundary and shunned the suburban sprawl that was sweeping most of the nation. Oregon can be a leader once again in urban revitalization and affordable housing. This will happen when private developers and the public sector view each other as allies and partners rather than as adversaries. Conversations, task forces, and study groups will not be enough. Municipal, county and state leadership must develop the resources and frameworks necessary to connect the dots between an abundant resource (vacant space in buildings) and a pressing need (housing).

This column is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.

Column first appeared in the Oregon Daily Journal of Commerce on November 15, 2024.