August 28, 2023

Adaptive Reuse: A Powerful Tool to Reimagine Downtown Portland


An analysis of 2023 Oregon HB 2984

As we discussed in our roundup of housing-related legislation from the 2023 session, the state legislature took action to promote the conversion of underutilized commercial buildings to residential dwelling units.  While a number of questions remain unanswered regarding the economic viability of commercial to residential conversions, HB 2984 takes several important steps to smooth out the regulatory path for potential projects.

HB 2984 couldn’t come soon enough.  Recent figures show that Portland’s office vacancy rates continue to climb.  A report from CBRE put the Downtown Portland vacancy rate at 28.4 percent with total availability (i.e. vacancy plus available subleases) at a staggering 32.9 percent.  Unfortunately, these numbers don’t tell the whole story.  On top of that, brokers believe that underutilized space (i.e. space a tenant currently pays for but does not actively use) could be another 10 percent of all office square footage.  Add it up and – absent significant changes to market conditions – 40 percent of all downtown office space will be empty in the coming years.

A consistent high vacancy rate would lead to spiraling effects.  Empty buildings mean reduced tax revenue for the City, which leads to lower levels of service and a push for higher tax rates.  Additionally, fewer tenants means less eyes on the street, which leads to higher property crime rates.   Finally, empty buildings mean less patrons for small businesses, which are the lifeblood of any downtown.  This combination of service reduction, higher taxes, increased crime, and the loss of small businesses only serve to further disincentivize commercial expansion or relocation downtown.

At the same time that Downtown Portland is facing unprecedented headwinds, Oregon is grappling with an ever expanding housing crisis.  Due to continued levels of high household formation and anemic housing production, recent estimates show that we need tens of thousands of new housing units just to catch up with existing demand.

Fortunately, there is a solution to both the cratering demand for office space and the desperate need for new housing. Commercial-to-residential conversions – or adaptive reuse in planning parlance – has long been a tool for cities to reimagine their skylines, bring new housing and people into the urban core where public services and utilities are readily available, and boost tax revenue.  Think Pearl District in the 1980s, or South Waterfront more recently.

The Portland City Council has taken steps to promote adaptive reuse downtown.  In March 2023, it approved temporary impact fee waivers and eased earthquake retrofit requirements.  Despite the recent changes, the City has not done enough  to spur the adaptive reuse of older office buildings, because the math still does not work.

If Portland – or any other city – wants to pursue a robust adaptive reuse strategy, they should build on HB 2984 and take a page out of Los Angeles’ playbook.  While California may not be the poster child for good housing policy, the City of Angels has one of the most – if not the most – effective adaptive reuse ordinances in the country.  Armed with a robust set of conversion rules, Los Angeles was able to spur downtown redevelopment via the creation of tens of thousands of new residential units, which – in turn – allowed local businesses to flourish and brought in tens of millions of dollars in new tax revenue.

An effective adaptive reuse ordinance represents an exercise in government getting out of its own way.  Instead of crafting a series of hoops for developers to jump through – as is generally the case with new building and zoning regulations – cities should do the exact opposite and slash any red tape that stands in the way of successfully converting buildings from commercial to residential use.  Like Moses with his legendary staff parting the Red Sea (or if you prefer, Gandalf splitting the bridge before the Balrog), the City must remove the obstacles to success (e.g. the creation of lots and lots of new housing).

First, a city should allow adaptive reuse outright (i.e. no discretionary approval necessary) in all commercial and medium and high density residential zones.  HB 2984 took the first step down this path and prohibited local governments from requiring either zone changes or conditional use permits for conversion projects.  That is important, but does not go far enough.  In order to support adaptive reuse, a city should build on HB 2984 and – for conversions of existing buildings –  waive all design review, site plan review, variance review, and the entire alphabet soup of discretionary reviews currently applicable to new projects.  Basically, they should require only a building permit checklist review process (if you meet the building code, you’re project gets the green light).  Doing so would show the development community that the City wants, rather than will merely tolerate, the conversion of commercial buildings.  Los Angeles did exactly this, and swept away the entire discretionary review process for adaptive reuse projects. Doing so removed cost, delays, uncertainty from the development process, and encouraged property owners to pursue conversions.

Yes, this means cities should permit the conversion of commercial buildings even if they don’t meet current zoning code standards for density, floor area, height, open space, setbacks, and parking.  These standards, which the city treats as sacrosanct rules that were handed down at Mount Sinai, inhibit a developer’s ability to make a project pencil financially.  Importantly, absent a waiver from these – and other – zoning standards, existing buildings will fail to meet current code requirements and will require a host of costly upgrades to come into compliance.  HB 2984 recognizes this and limited the ability of jurisdictions to require more parking than already exists.  Portland would need to greatly expand on this and remove bicycle parking, common space, and a whole host of other local requirements that govern the interior and exterior of buildings.  Just as with the land use review procedures, Los Angeles did just this and permitted buildings to transition from commercial to residential uses without requiring unnecessary changes to structure and form.

HB 2984 kicked off an important conversation and took clippers to zoning codes, pruning back some of the jurisdictional overgrowth that actively stifles adaptive reuse.  If Portland wants to get serious about its existing housing and commercial vacancy crises, it should put down the clippers, and get out a hacksaw.  The city has spent the last decades layering on greater and greater regulations that add significant cost to new housing   While these rules are well-intentioned, they are budget busters for all but except the upper classes and incompatible with housing that is affordable for everyone else.

Adaptive reuse, if properly incentivized, could be a fantastic tool to help reinvigorate our downtown core.  This author certainly hopes that Portland will take the bold steps necessary to build on HB 2984 and create an opportunity to turn empty offices into vibrant residences.

Tags: Construction, Real Estate and Land Use, Commercial Real Estate

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