Philly’s Great Office Building Conversion Needs to Start Right Now

Center City’s office building conversion can bring about a brighter future. / Photograph by Jumping Rocks/Universal Images Group via Getty Images)

The COVID pandemic is something most of us will never forget. One of the permanent shifts brought about by the pandemic is how — and where — people work. Over the last four years, people in and around Philadelphia have seen home and office merge, with hundreds of thousands of employees now working out of their houses or apartments at least a couple of days per week.

Many of those workers love the new arrangement, but for cities — Philadelphia included — the shift has created a big challenge in terms of empty downtown office space. How big? According to a recent white paper by the real estate firm Savills, in the 15 years before the pandemic, Philadelphia’s office vacancy rate hovered between 12 and 15 percent. Today it’s above 23 percent. And according to Rialto Capital Management, office valuations over the last 18 months have fallen 40 to 70 percent.

Particularly at risk are some of Philadelphia’s most iconic office buildings. The Inquirer reports that the Wanamaker building’s vacancy rate is 65 percent, Centre Square’s is 47 percent, and One South Broad’s is just under 42 percent. Meanwhile, the office towers at 1700 Market Street and 1515 Market Street are facing large enough challenges that their mortgages have been sent to special servicing.

For building owners (and the banks that finance their mortgages), all of this spells big trouble.

But it’s also potentially catastrophic for Philadelphia overall. Fewer downtown office workers makes it harder for Center City businesses to thrive. Emptier streets only add to the perception the city isn’t safe. That perception isn’t accurate — crime has fallen significantly in the last couple of years — but opinions like that are hard to change.

Finally, lower occupancy rates mean the value of downtown office buildings will continue to decrease — which will ultimately lead to significantly less tax revenue for the city. We’re already seeing it happening. Because of its declining value, a few weeks ago the owners of Centre Square — which had been assessed at $362.6 million — successfully appealed to reduce the building’s assessment to $275 million for 2023 and $250 million for 2024. It was the correct outcome, but it will cost the city $2.8 million in taxes over two years.

Unfortunately, Centre Square is just one of what will be many reassessments in the months and years ahead, costing the city hundreds of millions, if not billions, of dollars.

Three Steps We Need to Take Right Now

What can we do about this? Big picture, we need to find ways to get more people living and working in Philadelphia by creating high-paying jobs. I’ll talk about some ideas for that in my next column.

Here, I want to focus on one straightforward, though not easy, solution to the vacant office problem: rethinking those empty office buildings by either converting them into residential units or making them more attractive to employees so they actually want to come into the office.

When I say it won’t be easy, what I mean is that such conversions and upgrades are expensive. For instance, thanks to the way most office buildings are constructed, converting an office building to residential costs at least $300 to $400 per square foot. For a building that’s, say, 140,000 square feet, that means a total conversion cost of $42 million to $56 million. Based on the rents building owners can get, such a switch might not even make financial sense.

This is why I think the city — and the state — need to step in with policies and programs that will make it easier and cheaper to rethink and repurpose office spaces. The best way forward would be to create a task force of real estate professionals, tax attorneys, the Office of Property Assessment and other relevant parties to study the issue in-depth. But here are some ideas we should be considering:

1. Better utilization of tax abatements

The 10-year property tax abatement the city adopted in the late 1990s was actually put in place to incentivize the conversion of an earlier generation of office buildings into residential. It worked spectacularly, and we should run a version of that playbook again. Should the abatement be longer? Should the building owners get certainty on the reassessed value of their projects? The task force can figure out such details, but the abatement program is an effective tool.

2. Streamlining the process

Right now permitting and zoning can slow projects down significantly — time we can’t afford to lose. The city should not only find a way to fast-track these kinds of conversions, but make the process easier by creating one-stop shopping for building owners — one person in city government they can deal with to work through everything required.

3. A state tax credit

Philadelphia can’t — and shouldn’t — do this alone. Whether it’s in the form of a state tax credit or some other vehicle, we need state assistance to convert or improve office buildings. The state has a lot at stake here; Philadelphia supplies an enormous amount of tax revenue, so if we struggle, the commonwealth will struggle, too. I’m hopeful Governor Josh Shapiro will see this issue as a priority.

Some people might view such initiatives as a bail out, but I think that’s the wrong way to look at it.

The truth is, converting offices to residential and making offices more attractive overall will actually improve Philadelphia’s economy and make the city even stronger in the long run. Think about it: Most offices empty out at 5 p.m. But when those buildings are occupied by residents, you have people out and about until later in the evening. That not only benefits shops and restaurants; it makes the streets even safer than they already are.

The most important thing to remember as we face this challenge is that we all need to work together on it. When entrepreneurs and businesses do well, and when people who own real estate do well, so does the city overall. Jobs get created. Tax revenue grows. The city is truly a partner in every venture — every failure is the city’s failure, but every success is the city’s success. So let’s start working together on this and make Philadelphia even better in the years ahead.