A suburban Maryland county near Washington, D.C., approved incentives to convert largely vacant office buildings into housing, following moves in the District and Virginia, in an action that drew some pushback from the county leader who said it sacrifices needed tax revenue.
The Montgomery County Council said it approved a zoning measure to expedite the process to allow office-to-residential conversions and legislation to establish a 20-year tax break for such projects that include at least 17.5% affordable housing units.
Proponents of the effort said the moves will help remedy the affluent county's lack of housing supply while reviving underutilized buildings that generate little tax revenue for the local government because their values are reduced when empty or mostly vacant. However, Montgomery County Executive Marc Elrich expressed his intention to veto the legislative component, he said, because the tax abatement would give project developers more money than needed to make conversions viable.
It's a debate that could become more common around the country. Some aging office buildings are struggling to retain tenants as corporations opt for higher-quality properties and stagnant U.S. office demand contributes to the national vacancy rate climbing to 14%, according to CoStar data. That has forced some landlords and local governments, including Montgomery County's neighbors, to determine how to revitalize or reposition buildings.
In Washington, the city said this year it would allow office properties converting into multifamily buildings to be classified as residential earlier in the transformation process, and last year the District launched a tax abatement program of its own.
In Northern Virginia, Arlington County also adopted rules to assist and hasten office-to-residential conversion projects.
Repurposing offices 'a positive'
A developer applauded Montgomery County's actions to expedite and financially aid the conversion of offices to residences.
“The office market in Montgomery County just hasn’t bounced back at all,” Doug Firstenberg, a founding principal at Bethesda, Maryland-based real estate development firm Stonebridge Associates, said in an interview with CoStar News. “Getting rid of overstock and repurposing it to residential, we view that as a positive for the market."
In and around Bethesda, an especially well-heeled part of Montgomery County, office vacancy is at 24.6%, one of the highest in metropolitan D.C., according to a CoStar Market Analytics report.
The incentives “may help some projects move forward in the next few years that otherwise would just sit there,” said Matthew Gordon, a Maryland land use and zoning attorney with law firm Selzer Gurvitch Rabin Wertheimer & Polott, in an interview with CoStar News.
Both he and Firstenberg said the expedited process could shave months off the approval timeline.
Councilmember Natali Fani-González, who helped spearhead Montgomery County's development incentives, told CoStar News that she expects the County Council to override a veto if it came to a vote.
“The motivation, for me, was creating more housing,” she said. “When you have offices that are vacant, they’re not producing enough revenue, like taxes, and they bring crime, they don’t activate their communities."
Under the new Montgomery County zoning rules, an expedited approval process is now in place for owners of eligible buildings at least two stories high that apply to convert from commercial to residential use.
The approved bill also authorizes a tax abatement, known as a "payment in lieu of taxes," or PILOT, that would exempt 100% of the real property tax that would otherwise be levied for a period of 20 years.
Projects would be eligible if the office being transformed has at least a 50% vacancy rate at the time of the conversion application and the owner agrees to provide at least 17.5% of units as affordable to households earning 60% or less of the area median income.
The tax break kicks in once the converted property’s residential occupancy certificate is approved, Councilmember Fani-González said.
Andrew Friedson, another county councilmember, told CoStar News that the value of the properties would increase when redeveloped for residential use. Therefore, when the tax abatement expires, the county ultimately would collect more revenue than it had surrendered.
A fiscal impact statement in a report prepared by county staff found real property tax revenue could decrease by about $5.8 million in fiscal year 2026 and by about $130 million between then and fiscal year 2031 as a result of the abatement program.
The act sunsets after 10 years from the effective date of the legislation. Any agreements entered into prior to the sunset must remain in full force and effect, according to the legislation.
"Vacant offices are a scourge on communities,” Friedson said. “They are a negative for our tax rolls. And they are an unproductive use that is taking away from the opportunity to provide benefits like housing and amenities that we would want.”