Remember my Office Conversion Series from last year? If you missed it, you can catch up here. Now, thanks to a new bill signed by Governor Katie Hobbs, the ideas we discussed in that series might have some assistance from the State of Arizona. Specifically, there are two issues: (1) too many vacant commercial buildings and (2) not enough housing. House Bill 2297 allows developers to convert outdated commercial properties into residential units without the usual rezoning process, saving both time and money. Some other key takeaways below:
— Quicker Conversions: Developers can now skip the rezoning process for up to 10% of outdated commercial buildings, speeding up the creation of new housing.
— Limited Impact: Metro Phoenix has millions of square feet of office space ready for conversion, but these projects are costly and complex. Don’t expect a massive wave of new housing overnight.
— Community Input Concerns: The bill cuts out public hearings, which could reduce opposition but also limits community involvement in shaping these new developments. We will see both good and bad outcomes from this part of the bill.
House Bill 2297 could jump start much-needed housing projects by repurposing empty commercial spaces. While it offers potential, the real question will be how many developers are ready to take on the challenge and whether these projects fit their current neighborhood well.
If you’re curious about how this could impact your commercial building, let’s talk.
New bill could help convert old commercial buildings in Phoenix
By Audrey Jensen – Reporter, Phoenix Business Journal
Apr 23, 2024
One Camelback in Uptown Phoenix is one local example of an office-to-apartment conversion project. Jim Poulin | Phoenix Business Journal
A housing bill signed into law by Gov. Katie Hobbs could help with two major challenges in metro Phoenix: housing shortages and a surplus of vacant commercial buildings.
House Bill 2297 will allow developers to convert or demolish a small portion of a city’s commercial, office or mixed-use buildings for new residential development without going through the rezoning process, potentially saving months in the building process.
Starting in 2025, Arizona cities with populations of more than 150,000 have to allow for up to 10% of all commercial real estate buildings that are considered economically or functionally obsolete to be reused or demolished for new housing — about 10% of which would be set aside for moderate or low-income tenants.
Developers will not have to apply for a conditional use permit, rezoning application or any other application that requires a public hearing if they’re converting or developing a commercial building that a municipality has chosen as part of this program.
House Majority Leader Rep. Leo Biasiucci, the main sponsor of the bill, said the program could help pique the interest of investors and developers, knowing they could save on costs and time to bring more apartments, townhomes and condos to the area.
“I think it’s going to be something that really changes Arizona for the better,” Biasiucci told the Business Journal.
Local zoning attorneys say the bill could result in more development but say its impact is unknown. Other challenges also remain.
Converting commercial or office buildings into partial or fully multifamily, for example, can be both costly and complex. Although a number of older vacant office buildings could be ideal candidates for conversion, real estate experts don’t expect the trend to catch on in Phoenix.
Jason Morris, a land and zoning attorney and founding partner at Withey Morris Baugh PLC, said he hopes the bill is utilized by the real estate community but is concerned about the practicality of the legislation.
“I don’t think we’re going to wake up tomorrow and find that all of sudden there are a lot more housing opportunities at these buildings,” said Morris.
Metro Phoenix has 22 projects that have been completed or are planned for conversion of 3.3 million square feet of total office space into other uses, according to CBRE Group Inc. research in Q1 of 2024. This includes nine conversions into multifamily or mixed-use developments including the stalled One Camelback project and the former Phoenix Financial Center.
Attorney says program could be used for other commercial buildings
Ben Graff, a land use and zoning attorney for Quarles & Brady LLP, said the program could help address other commercial buildings such as big box retail or abandoned strip malls in some parts of the Valley.
While Graff said he broadly supports the legislation, he raised concerns about removing the public hearing process.
“Those public hearings are what allow the stakeholders to come together and evaluate how to make a multifamily development best fit within a community,” Graff said. “It allows the city … to add stipulations and requirements on the development that wouldn’t normally occur in the as-of-right.”
At the same time, the removal of a public hearing process could reduce the “Not in my backyard” sentiment that has at times curbed developments. Ultimately, the number of developers who take advantage of this program will depend on market conditions, Graff said.
Depending on how well the program does, each city can modify the 10% for how many buildings are part of the program every 10 years, Biasiucci said.
Housing has been one of the key focuses for this year’s legislative session.
Biasiucci also sponsored a bill known as the Arizona Starter Homes Act that would have provided homebuyers with more options for lot sizes and help lower the overall costs of a home. Hobbs vetoed the bill following concerns raised by the Department of Defense and public safety officials.
