States and Cities Turn to Adaptive Reuse Incentives to Expand Housing Supply

Since the pandemic, state and local lawmakers have increasingly turned to adaptive reuse policies to make it easier and less costly for developers to convert vacant or underused commercial buildings into housing. While approaches vary widely from one state to another, most efforts fall into four broad categories: tax incentives, streamlining regulations, changes to zoning law and direct public financing. Below are a few examples of how policymakers are using these policy tools to unlock more housing through commercial-to-residential conversions.

Tax Incentives

Many states have turned to the tax code to encourage the redevelopment of vacant commercial buildings. These incentives can help offset the conversion costs, particularly in older buildings that may require significant retrofit costs. At the state level, Illinois lawmakers recently expanded their “Strong State Historic Tax Credits” program to allow housing development in older commercial buildings. This year in Missouri, the Senate passed a bill (MO SB 35) authorizing nonrefundable tax credits of 25–30% for commercial-to-residential conversions. Even though the bill did not make it to the governor’s desk, it had broad support from the business community and could be reintroduced next session.

Public Funding and Financing Tools

Some states and cities are offering direct financial support—such as loans, grants, tax increment financing (TIF) or long-term tax abatements—to help offset the cost of adaptive reuse. In 2023, Wisconsin lawmakers enacted a bill (WI AB 268) to establish a commercial-to-housing conversion revolving loan fund administered by WHEDA. And in Boston, the city offers a payment-in-lieu-of-taxes agreement with a 75% abatement for up to 29 years. 

Removing Regulatory Barriers

Conversion projects often get bogged down in lengthy permitting processes or requirements originally designed for new construction. Some states and cities are responding by simplifying or eliminating unnecessary red tape. For example, Arizona lawmakers enacted legislation (AZ HB 2110) this year requiring large cities to create adaptive reuse standards that do not require conditional use permits or public hearings. While in Seattle,  commercial-to-residential conversions are exempted from parts of its design review process, including Mandatory Housing Affordability (MHA) requirements.

Changes to Zoning Laws

In many places, commercially zoned land does not allow for residential development. States are increasingly updating zoning rules to permit multifamily housing on commercial sites, thus unlocking properties that were previously off-limits for residential use. California lawmakers passed legislation (CA AB 2011) in 2022 that created a special pathway for multifamily housing on certain commercially zoned sites. Montana enacted a law (MT SB 245) a few years ago requiring larger cities to allow multifamily housing in most commercial zones as part of a broader legislative campaign to boost housing supply. And finally, this year, New Hampshire lawmakers enacted legislation (NH HB 631) that permits residential buildings and developments in areas zoned for commercial, such as retail and office.

While there is no “one-size-fits-all” approach to adaptive reuse, the growing number of policies that states and localities are experimenting with reflects a public desire to provide solutions to boost the supply of available housing units. As policymakers continue to refine incentive policies and remove regulatory barriers, expect more adaptive reuse policies to be proposed in the broader housing discussion. 

For more information contact gpp@icsc.com.