About the author: Salim Furth is a senior research fellow and director of the Urbanity Project with the Mercatus Center at George Mason University. He’s the author of a new policy brief on “Housing Reform in the States: A Menu of Options.”Many American cities are facing a dual real-estate crisis: Residential prices are soaring while office buildings sit empty. Neither of these problems can be solved overnight, but cities and states can help address both by making it easier to redevelop commercial sites for residential use. This housing-cost crisis has been decades in the making. Zoning codes have become stricter, limiting where housing can be built and attaching costly requirements such as large minimum lot sizes. As a result, the United States has been building fewer and fewer new homes
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About the author: Salim Furth is a senior research fellow and director of the Urbanity Project with the Mercatus Center at George Mason University. He’s the author of a new policy brief on “Housing Reform in the States: A Menu of Options.”
Many American cities are facing a dual real-estate crisis: Residential prices are soaring while office buildings sit empty. Neither of these problems can be solved overnight, but cities and states can help address both by making it easier to redevelop commercial sites for residential use.
This housing-cost crisis has been decades in the making. Zoning codes have become stricter, limiting where housing can be built and attaching costly requirements such as large minimum lot sizes. As a result, the United States has been building fewer and fewer new homes per capita. When a supply-constrained market is hit with a surge in demand, prices skyrocket. And housing demand has surged mightily in 2021 as people working from home want more space, and low interest rates have stretched the buying power of those with good credit.
In the office sector, the popularity of flexible-work arrangements, especially among younger workers, is making companies rethink their leases. When it comes time to renew, even some profitable, growing office tenants will downsize—or take advantage of lower prices to move to a better location. Real-estate services company JLL estimates that at least one-fifth of office space is vacant in 17 of the 54 major U.S. markets, including New Jersey, Dallas, Denver, and Miami.
Retail markets are in much better shape than offices. Vacancies are steady around 5%. But the sector faces headwinds with the steady rise of e-commerce and decline of malls, and there are always retail locations that have lost their viability. Although retail space is not the center of a current crisis, expanding zoning flexibility now will help cushion the sector against future economic changes.
To be sure, zoning is not the only barrier to repurposing commercial real estate. Some locations are unattractive for housing. Most commercial structures cannot be repurposed; they have to be replaced. And financial investors can be skeptical of creative—that is, unproven—concepts.
But for the many sites where residential construction could work, zoning is often the dealbreaker. A combination of local fiscal worries and the loud voices of a Nimby (“not in my backyard”) minority have made many local governments finicky about growth. In some jurisdictions, most new developments are channeled through an opaque “planned unit development” process that allows local officials a veto over everything from density to aesthetics, which opens the door to corruption. Other jurisdictions would prefer to keep abandoned sites vacant in hopes of someday landing a lucrative commercial taxpayer.
Taking the long view, cities have much to gain from allowing and encouraging residential growth in underperforming commercial sites. Unlike greenfield construction, redevelopment of an existing site adds nothing to the city’s long-term maintenance liabilities for roads, utilities, and stormwater management. And the Nimby resistance to new housing is likely to be muted on commercial sites.
What types of housing are right for former commercial spaces? In neighborhoods and downtowns, the solutions might involve adaptive reuse rather than new construction. But most underperforming commercial space is, not surprisingly, in second-tier locations, like half-empty suburban office parks. These lend themselves to suburban-style residential development: garden apartments, Texas doughnuts, and manufactured home parks. Larger sites can become subdivisions or planned communities, with whatever mix of housing styles makes sense in the local market.
In North Chesterfield, Virginia, local officials recently allowed new apartments on land that had been zoned and waiting decades for office development that never came. And in Wellesley, Mass., an office-park owner has proposed a partial redevelopment that would include multifamily space along with a broader mix of commercial uses. Such developments are not uncommon—but they take longer, cost more, and are much rarer when they rely on case-by-case rezoning.
The simplest and most necessary step to allowing residential redevelopment is to permit residential uses in commercial zones on a by-right basis. Many cities do so already.
But cities need to go further, allowing parcel subdivision (ideally down to 1,000 square-foot lots, which can host a small townhome) and shrinking or eliminating parking minimums so that parking lots can be redeveloped without necessarily demolishing a partially occupied commercial building.
States can get into the act as well. While no city can solve a regional housing crisis on its own, state action has a fighting chance. Legislatures can open all commercial areas to both multifamily and single-family residential construction with small lot sizes, although they ought to write in exceptions for the few locations that are physically unsafe or give cities the right to appeal.
States seeking a lighter touch can limit applicability of legislation by vacancy status, location, or parcel size. One alternative is to preempt local zoning only for underused parking lots and parcels with a high vacancy rate on the date of passage. Another is to apply it only where a commercial parcel can be connected to a neighborhood street grid. A third would be to limit the changes to parcels of two acres or more.
Cities and states might be tempted to add a list of costly conditions to residential conversion rezoning, such as requiring ground-floor retail, luxury-design standards, or inclusionary zoning. But they should resist the urge to tinker—because construction won’t happen at all unless it pencils out. In second-tier locations, that’s more likely to mean simple starter homes than the perfect “lifestyle center” drawn in a planner’s pastels.
Times change. Cities change. Zoning needs to change along with them.
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