While we long have abhorred, and will continue to disdain, the growing and dubious trend of taxpayers being tapped to fund the conversion of privately owned office buildings into residential units – when the marketplace is rejecting such conversions as economically inefficient – there is a government-created impediment partly at play.
As the Post-Gazette detailed on Sunday, onerous government regulations and reams of red tape employed to oversee those regulations have helped to strangle city development.
The story has been often and well told of downtown Pittsburgh’s high-rise office occupancy diaspora. And while the COVID-19 pandemic that led to a lockdown and work from home widely is blamed for the problem – indeed, it clearly exasperated it – high vacancy rates had plagued Downtown skyscrapers well before.
And some building owners have only themselves to blame for not keeping amenities up to client expectations, thus fueling their flight.
All manner of “solutions” have been proposed to revitalize the Downtown area. Some involve the creation of taxpayer-subsidized loan funds. Others involve outright taxpayer grants. Then there are government-sponsored tax-abatement programs, typically on the value of the new, converted redevelopments.
Developers repeatedly have cited a number of contemporary economic whammies they face in getting such projects off the ground. Construction costs have soared. So have borrowing costs. And the amount of a total project that lending institutions are willing to underwrite has shrunk.
Most of those higher costs are due to inflation. But, truth be told, many of those same lending institutions are relaying the marketplace’s clear signal – such office-to-residential conversations too many times are a poor risk because they are not economically efficient.
Enter the developers, pleading for either taxpayer-backed loans or outright taxpayer grants to pursue their projects. And it typically comes with the standard twisted rationale: Taxpayer help will make the projects “affordable.”
Talk about a non sequitur.
But, ancillary to those funding challenges comes the government challenge, one that the Allegheny Institute has spent decades documenting. And as Sunday’s Post-Gazette story recounts, but one example, the problem isn’t going anywhere soon.
“In early 2023, [Pittsburgh Mayor Ed] Gainey raised the fees for zoning permits twentyfold, an increase so steep that one study said it made Pittsburgh ‘the most expensive city in the country to do business in.’
“After an outcry from developers, the mayor capped the fee at $40,000 — still far higher than many other cities, where the cost can be a few thousand or even hundreds of dollars, according to the study.
“For a major project on the scale of what’s been proposed in Pittsburgh’s Oakland neighborhood, the fee in Philadelphia would be $2,621. In Columbus, Ohio, it would be $565. In Raleigh, N.C., $2,272.
“In Pittsburgh’s east end, a major expansion of Bakery Square that would add retail and housing space to the area has bogged down amid talks with Mr. Gainey’s administration, even after the developer and a community group signed an agreement that would have resulted in millions of dollars in investment in Larimer, one of the city’s poorest neighborhoods,” the P-G detailed.
And it’s just a small sample of how arbitrary, capricious — and hardly competitive — government regulations are and how they can stifle privately financed economic development.
High construction and interest costs aside — along with lending institutions less willing to take on higher risks – onerous regulations can be the difference between a project being built or left to languish on the drafting table.
All this said, we’re not about to soften our stance on public subsidies for office-to-residential conversions. In far too many cases, they make absolutely no economic sense and are far from the grand “revival” that proponents claim the movement to be in other cities across the country.
Perhaps a “revival of hefty taxpayer subsidies” would be the more operative phrase. For, of course, it’s easy to “revive” anything with enough taxpayer dollars. Ahem.
And, sadly, government edicts in many of these projects contain an equally non sequitorial “affordable housing” edict, making such projects even less affordable with the higher costs/risks putting even greater demands on the taxpayer kitty and risking turning downtown Pittsburgh into lower-income “government housing” district.
Perhaps, someday, these kinds of conversions will make sense. But only if it’s private developers taking on the preponderance of risk in hopes of turning a profit.
But all this said, it behooves government at all levels to help facilitate such developments – not by raiding the taxpayer kitty but by making sure any applicable regulations are, first, necessary and then applied as fairly and at the lowest cost possible.
Colin McNickle is communications and marketing director at the Allegheny Institute for Public Policy (cmcnickle@alleghenyinstitute.org).
