Commercial‐​to‐​Residential Zoning Reform

My name is Chris Hansford, and I am the Director of State Relations at the non-partisan Cato Institute.

I aim to address two pressing challenges facing the United States as a whole, the Arizona real estate market, and how deregulation of commercial real estate vacancies can help with housing affordability.

Radical changes in how Americans work and live have put immense pressure on the U.S. commercial real estate market, including in Arizona. According to data from C‑B-R‑E, close to a quarter of office buildings in Phoenix, Tempe, and Scottsdale sat empty in 2023. Because demand is lower for office buildings, they are currently being sold at steep discounts across the state, and they are pinching municipal budgets that rely on taxes from valuable commercial properties.

Furthermore, while the shrinking demand in the United States commercial real estate market alone probably isn’t big enough to start a recession on its own, recent research shows that it could pose a significant risk to hundreds of small regional banks, potentially leading to solvency crises that could spread to the rest of the U.S. economy.

The second challenge is housing supply and affordability. According to Pew Research, from 2017 to 2023, rental prices across Arizona surged by 53 percent, with even higher percentages in Tucson, Mesa, Glendale, and Phoenix. Meanwhile, the average monthly cost of homeownership in the state increased by 73 percent over that same time.

Today you have the opportunity to address both challenges of commercial vacancies and housing affordability. By permitting repurposing underutilized commercial spaces into residential units, developers can inject much-needed housing supply into our communities. This helps to moderate housing prices, revitalize surrounding neighborhoods, and stabilize local tax bases.

Thank you for your time and consideration, I look forward to any questions.

Bill Objectives

• Objective: Municipalities with a population of over 100,000 must establish objective standards by January 1, 2025, allowing multifamily residential development or adaptive reuse on up to 10% of existing commercial, office, or mixed-use buildings without requiring additional permits or public hearings.
• Designation of Exempt Areas: Municipalities may designate certain commercial or employment hubs and other essential commercial areas where existing buildings are excluded from the provisions of the bill. These designations cannot exceed 10% of existing commercial buildings based on the most recent general plan.
• Requirements for Multifamily Residential Development or Adaptive Reuse: Objective standards established by municipalities must require, but not exceed:
  • Municipal site plan review and approval process
  • Adequate public sewer and water service
  • Compliance with all applicable building and fire codes
  • Economically or functionally obsolete existing buildings
  • Existing buildings on parcels between one and twenty acres in size
  • Set aside of 10% of dwelling units for moderate-income or low-income housing
• Parking Space Requirements: Objective standards may not contain parking space requirements exceeding those for multifamily residential buildings or adaptive reuse buildings under existing zoning codes unless the development qualifies as a mixed-use development.
• Provisions for Multifamily Residential Development: Specific provisions apply for multifamily residential development, including allowance for demolition of existing buildings, setback requirements, height and density limitations, and exemptions for rooftop appurtenances.
• Provisions for Adaptive Reuse: Specific provisions also apply for adaptive reuse, including allowance for demolition of existing buildings, setback requirements, and limitations on height and density.
• Exclusions: The bill does not apply to designated historical areas, land designated as historic by local or national authorities, land near military or federal aviation facilities, or land within municipalities located on tribal land.