In recent years, California has faced a dual challenge of declining demand for office and retail space and a pressing need for affordable housing. The rise of e-commerce and the shift towards remote work, accelerated by the Covid-19 pandemic, have contributed to the decreasing demand for commercial buildings. As a result, policymakers, advocates, and planners in California have started considering commercial space conversion as a strategy to increase housing supply and address the affordable housing crisis.
In this article, we will explore the viability and conditions surrounding the conversion of commercial space to residential use in California. We will delve into two studies conducted by the Terner Center for Housing Innovation at UC Berkeley and discuss the potential impact and promising models of converting commercial lands to housing. Additionally, we will examine the challenges and opportunities of adaptive reuse of commercial buildings, the distribution of commercial land conversions in California, and the emerging trends and limitations of these conversions. Finally, we will discuss the property tax implications of converting commercial space to residential use.
Converting Commercial Lands to Housing: Potential Impact and Promising Models
The Terner Center for Housing Innovation at UC Berkeley conducted a study titled "Strip Malls to Homes: An Analysis of Commercial to Residential Conversions in California." This study provides valuable data on existing conversions across California and models the future of conversions under current policies and development practices. The study reveals that commercial land is ubiquitous, found in both wealthy and poor areas, and both downtowns and peripheries of cities. The conversion rate is higher in city centers and tapers off as the distance from the center increases in major metropolitan areas such as Los Angeles, San Francisco, Sacramento, and San Diego.
From 2014 to 2019, approximately 10 percent of new housing in California was constructed on commercial land, with Los Angeles accounting for a significant portion of these conversions. The higher percentage in Los Angeles can be attributed to more permissive legislation and effective marketing of the new legislation to developers. However, it is crucial to note that even with more permissive legislation, the models show that housing produced on commercial lands would only account for 4 percent of California's Regional Housing Needs Assessment allocations in the Los Angeles and San Francisco metropolitan regions.
Adaptive Reuse of Commercial Buildings as Housing
While demolitions are the most common type of commercial conversion, there is growing interest in promoting the adaptive reuse of commercial buildings as a more environmentally sustainable option. Adaptive reuse involves repurposing existing commercial buildings for residential use, avoiding demolition waste and carbon emissions. A study titled "Adaptive Reuse Challenges and Opportunities in California" by the Terner Center for Housing Innovation explores adaptive reuse's architectural design, legislative constraints, and economic feasibility.
Architectural design, legislative constraints, and economic feasibility are identified as the top three factors affecting the potential for adaptive reuse. The original design of commercial buildings, often from the mid-20th century, may limit the natural lighting and ventilation required for suitable living spaces. However, the high ceilings common in these buildings make them ideal for adaptive reuse as lofts that can serve as live-work residences. Legislative support, such as Los Angeles' adaptive reuse ordinance, passed in 1999, can expedite regulation and clarify building and zoning codes, encouraging developers to repurpose commercial spaces for housing.
The economic feasibility of conversions is also a significant consideration. In some cases, commercial conversions to nonresidential uses may be more financially advantageous due to higher developmental impact fees associated with bringing a building up to code for residential use. To incentivize adaptive reuse for housing, it is suggested that state or local jurisdictions eliminate or waive these fees. Furthermore, funding for infrastructure improvements resulting from repurposing commercial space can be provided to increase conversions to high-density developments in specific locations.
Distribution of Commercial Land Conversions in California
According to the Terner Center study, commercial land conversions are widespread across California, with locations in both affluent and disadvantaged areas. The study focuses on the four major metropolitan areas of Los Angeles, San Francisco, Sacramento, and San Diego. In these areas, the conversion rate is higher in the city center and gradually decreases as the distance from the center increases.
The data from 2014 to 2019 indicate that Los Angeles had the highest percentage of conversions, accounting for nearly three-quarters of all conversions in the state. This disparity is primarily attributed to more permissive legislation and effective marketing efforts targeting developers. However, it is essential to consider the potential implications of concentrating conversions in specific areas, as it may lead to class divisions and uneven distribution of wealth.
Emerging Trends, Limitations, and Opportunities of Commercial to Residential Conversions
While commercial-to-residential conversions offer a potential solution to the affordable housing crisis, it is crucial to acknowledge the limitations and emerging trends associated with this approach. The Terner Center study suggests that more than relying on commercial land conversions may be required to address the housing demand in California's major metropolitan regions. Developers may find it more financially advantageous to convert commercial properties into hotels, package distribution centers, or other industrial uses.
Additionally, the concentration of commercial buildings in specific neighborhoods may have implications for wealth distribution following conversions to residential units. The clustering of commercial buildings in certain areas, targeted by legislation like that in Sacramento and Los Angeles, can result in class divisions, with the wealthy residing in low-density, single-family residential zones and the less affluent living in high-density commercial corridors.
However, if policymakers are intentional about where adaptive reuse can occur, there is an opportunity to revitalize commercial corridors, often located along transit routes. Placing housing in these areas can provide residents with easy access to neighborhood resources such as grocery stores and public transportation. Successful adaptive reuse projects like the Warehouse Artist Lofts (WAL) in Sacramento demonstrate the potential of conversions in meeting affordable housing needs while creating a sense of community at the neighborhood level.
Property Tax Implications of Converting Commercial Space to Residential Use
When converting commercial space to residential use, property tax implications need to be considered. Converting a commercial property into a residential property may result in a change in the property's assessed value and, consequently, its property tax assessment. In California, property taxes are determined based on the assessed value of the property.
The property tax implications can vary depending on the specific circumstances and location of the conversion. It is advisable to consult with a property tax expert to understand the potential impact on property taxes and any available exemptions or incentives for residential conversions. A professional property tax expert, like AOPTA - The Property Tax Expert, can guide navigating the complex property tax system and ensure compliance with relevant regulations.
Converting commercial space to residential use presents both benefits and challenges for addressing the affordable housing crisis in California. While commercial land conversions offer the potential to increase the housing supply, there are limitations and considerations to be mindful of, such as the distribution of conversions, the economic feasibility of adaptive reuse, and the potential implications for wealth distribution. Moreover, property tax implications should be carefully assessed when converting commercial properties to residential use.
By understanding the viability, challenges, and opportunities of commercial to residential conversions, policymakers, advocates, and developers can make informed decisions to contribute to California's housing supply and address the affordable housing crisis. Working with property tax experts like AOPTA - The Property Tax Expert can ensure compliance with property tax regulations and optimize the financial aspects of these conversions. With careful planning and thoughtful implementation, commercial space conversion can play a valuable role in increasing housing availability and creating vibrant communities in California.