Downtown office buildings could soon become housing

The growing vacancy in Class B and C space has long been noticeable to the commercial brokerages touring office tenants looking for new digs, said Adam Burns, president of Boston Pinnacle Properties. Empty spaces were abundant, and the math simply wasn’t working on new residential construction. So Burns began hunting for Class B and C offices that could work as to convert into apartments.

“The writing was on the wall that Class B and Class C office had a vacancy problem in Boston,” Burns said. “There was an opportunity in the vacancy that was being created.”

Boston Pinnacle Properties has the six-story brick building at 281 Franklin St. in the Financial District under contract to purchase for $2.8 million — around $500,000 less than the property’s assessed value of $3.3 million — and Burns hopes to turn it into 15 apartments.

Five companies still have leases for office space at 281 Franklin, and they will need to vacate before the building can be converted. Three of those expire in June, another in November, and a third not until mid-2027. Burns notes that, in the current market, tenants have a good shot at landing leases at a much lower rent — maybe $20 less per foot than the mid-$50s per square foot some are paying now.

If successful, 281 Franklin would be among the first participants in the BPDA’s short-term tax break program that offers a steep discount on property taxes to developers who begin conversion projects by October 2025.

The pilot program would allow property owners to switch from a commercial property tax rate — currently $24.68 per $1,000 of assessed value — to a residential property tax rate — $10.74 per $1,000 of value — and then add a break of up to 75 percent off that reduced rate for 29 years. It’s open for applications through June.

But even with steep tax breaks, these conversions are challenging.

“Half or more” of downtown buildings won’t work as housing, Burns said, because of their layout and location. Many mid-block buildings, for example, aren’t easily converted because they have too few windows when compared to properties on street corners. As Burns has combed downtown looking for opportunities, he’s been focusing on buildings with at least three sides exposed, and with floorplates that aren’t too deep. Another complicating factor: Finding new homes for existing office tenants with years to go on their lease.

The tax abatement program won’t make a financially infeasible project work, Burns said, but it does “help move the needle in terms of getting to a ‘yes.’”

Equity Residential, a Chicago-based real estate investment trust that’s among the largest apartment owners in the US, has proposed converting several floors of medical office space that are housed within four Equity apartment towers located near Massachusetts General Hospital.

Equity plans to take offices used by MGH and other affiliated medical practices located at 1 and 10 Emerson Place and 2 and 5 Longfellow Place into 57 combined units, a project that could cost around $20 million.

Billerica-based development firm KS Partners plans to convert three connected buildings off Washington, Water, and Devonshire streets near Downtown Crossing into 98 apartments — a mix of studios, one- and three-bedroom units — with rents ranging from $2,900 to $3,820. The firm expects its total development cost on the conversion to be around $36 million.

Despite its tax break application, KS Partners still expressed concern about the financial feasibility of a conversion — particularly given what a company representative called the “high percentage” of affordable units required. Next year, the city of Boston will begin requiring developers of new housing projects to set aside 17 percent of units at affordable rents, with another 3 percent set aside for rental voucher holders, up from the current 13 percent.

“We feel strongly that for a decimated downtown Financial District… consideration should be given to lower the affordable threshold for office to residential conversions based on the significant investment required to convert,” a KS Partners representative said in an email to the Globe.

Should real estate economic conditions continue to worsen in 2024, the BPDA will reassess implementing the new affordable housing requirements in the fall, agency Director Arthur Jemison said at a public meeting last month.

Catherine Carlock can be reached at catherine.carlock@globe.com. Follow her @bycathcarlock.