DOT Pledges TOD Funds for Conversion of Downtown Offices to Housing

On October 27th, the White House announced a series of new actions, including a guidebook of tools and opportunities, in response to the growing number of vacant commercial buildings in the US. Part of the focus is using “transit-oriented development” (TOD) funding at the Department of Transportation for such purposes, including the TIFIA and RRIF loan programs, Thriving Communities program grants, and the new one-time “Neighborhood Access and Equity Grant Program” funded by the Inflation Reduction Act.

In the aftermath of the COVID-19 pandemic, occupancy rates for commercial buildings are facing decades lows. As of July 2023, about 12 percent of U.S. workers were working a fully remote schedule, and nearly 30 percent had a hybrid arrangement. Overall workplace occupancy is teetering around 50 percent, but many cities are facing lower rates of occupancy. While changes in working locations and patterns have provided more flexibility, the negative economic impacts to city centers are undeniable, with many worrying that some U.S. cities will be facing a “doom loop” where downtown businesses suffer, tax revenues decline, and cities begin struggling to provide basic services.  

Simultaneously, the U.S. is also facing a housing crisis. Following the Great Recession of 2008, the construction of new housing declined. When the COVID-19 pandemic hit, supply chains stalled, the cost of supplies skyrocketed, and major labor shortages were seen. The problem has only increased in the years since, and the U.S. is now confronting challenges surrounding housing supply constraints, increasing mortgage rates, and affordability for both rentals and home purchases. Between January of 2020 and July of 2023, the cost of a home in the U.S. rose by nearly 43 percent. Coupled with high mortgage rates, many have been pushed out of the housing market and back into the rental space, creating a squeeze on that market as well. In addition, the rise of short-term rentals (e.g., AirBnB) has contributed to the supply constraints in the rental market and driven up the cost of long-term rentals.  

What is the Biden Administration Proposing? 

The severity of commercial building vacancies and the housing crisis have drawn bipartisan attention, forcing many government and city officials, as well as property investors, nonprofit housing service providers and others, to scramble for solutions. One potential solution is to convert unoccupied commercial spaces into residential spaces. In this morning’s release, the Biden Administration provided a guidebook, detailing case studies and resources for navigating available programs, to compliment the Housing Supply Action Plan released in May of last year. 

The guidebook is an “all government” approach for commercial-to-residential conversions, providing information on all federal programs available to address this challenge while maintaining an emphasis on the Administration priorities of energy efficiency and greenhouse gas reduction.  

Within the guidebook, there are programs housed under numerous federal agencies, including the U.S. Department of Housing and Urban Development (HUD), the U.S. Department of Transportation (DOT), the U.S. Department of Energy (DOE), the U.S. Environmental Protection Agency (EPA), the U.S. Department of Agriculture (USDA), and the U.S. Treasury (UST), with additional resources provided by other federal entities, such as the General Services Administration (GSA) and the Office of Management and Budget (OMB). The guidebook provides descriptions of programs, use cases for programs, and information on layering various programs for the greatest alleviation of cost burden for conversion projects.   

On the transportation front, there are a few loan and grant programs available to developers, including a couple which are embedded within the Transportation Infrastructure Finance and Innovation Act (TIFIA) and Railroad Rehabilitation & Improvement Financing (RRIF). The available programs under DOT include the following: 

Agency  Program Type  Program Name  Summary 
DOT  Loans, loan guarantees  Transportation Infrastructure Finance and Innovation Act  Below-market interest rate loans and guarantees for transit-oriented development 
DOT  Loans, loan guarantees  Railroad Rehabilitation & Improvement Financing  Below-market interest rates loans and guarantees for transit-oriented development 
DOT  Technical Assistance  Thriving Communities Program  Technical assistance to advance transportation activities, including housing 
DOT  Grants  Neighborhood Access and Equity Program  Grants for projects that improve transportation and associated land use 

(Ed. Note: The Thriving Communities program may not be long for this world. It received $25 million appropriations in both 2022 and 2023, and the Administration requested $100 million for fiscal 2024, but both the House and Senate Appropriations Committees have voted not to fund the program in 2024, making its continuation into that year very unlikely. People shouldn’t pin their hopes on getting future funding for that one.)

Within TIFIA and RRIF, there are over $35B available for below-market interest rate loans and guarantees with stipulations for transit-oriented development. (With TIFIA, TOD projects can borrow up to 49 percent of the project cost.) Similarly, the Neighborhood Access and Equity Program, within the Inflation Reduction Act (IRA), makes over $3B in grants available for projects that improve transportation and enhance communities and connectivity – particularly in disadvantaged and underserved communities. Between these two programs, and additional guidance in which DOT is authorizing transit agencies to transfer properties to local governments, non-profit, and for-profit developers of affordable housing (can include commercial uses), the guidebook provides options for leveraging resources.  

The full guidebook can be viewed here 

Redesigning Communities 

While the release this morning does not create any new funding, senior administration officials have touted this guidebook as a new tool in the toolbox to address the growing housing crisis in the U.S. It is about figuring out how to leverage current resources and opportunities in new and innovative ways to ensure the most impactful outcome.  

Although the goals for these programs and the desire to repurpose some commercial spaces in downtown areas to alleviate housing burdens are laudable, the reality of commercial-to-residential conversions is not as seamless. There are multiple factors that impact whether a commercial space will be a good candidate for conversion to residential use. One such factor is zoning; a commercial-to-residential conversion may require a costly zoning variance request, or a lengthy and difficult process to update zoning codes. Other hurdles relate more directly to the structure of the commercial spaces. For example, some offices have large internal spaces that are difficult to subdivide for unit access to outdoor lighting, and without the ability to open windows, glass-sheathed buildings are prone to overheating. Structural engineering issues relating to lighting, indoor temperatures, electricity, and plumbing, among other residential considerations, can make commercial-to-residential conversions costly endeavors and limit the number of viable candidates. In a city like New York, it has been estimated that somewhere between 3 to 10 percent of buildings are good spaces for residential conversion.  

The guidebook released provides an important tool for addressing building vacancies and the U.S. housing crises. When paired with the goals of transportation accessibility, walkability, and community connectivity, commercial-to-residential conversions may become an important strategy for adapting, retrofitting, and redesigning our cities.  

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