So, lemme get this straight. We have an acute housing shortage in San Francisco. And our downtown office buildings are standing largely empty. Am I missing something here? Seems like a logical, common sense solution is staring us square in the face.
Let’s convert some office space into residential housing.
Before you take out your zoning rule book and start slapping me around, let’s talk this out. Sure, there are plenty of roadblocks. But we put a man on the moon. Surely, we can put a condo on Sansome Street.
This, by no means, is a new idea. Commercial real estate conversion and adaptive reuse have been urban planning catch phrases for decades, triggering avid support and rabid opposition at various times, for various reasons.
But I’m here to posit a simple truth: It’s time for San Francisco to give this idea serious thought. The pandemic has triggered many changes in our society. The shift in workforce behavior may be the most profound.
The City’s primary Big Tech tenants have signaled clearly the future will look very different. It will likely be a hybrid work model, where employees split time between home and office. As a result, the demand for commercial space will decline. We’ve already seen a major increase in vacancy rates in San Francisco, which pushed past 20% and higher in some areas of The City, according to data released this week by The City.
This much is clear. The times are changing, and San Francisco needs to change with it.
“The fact of the matter is, housing conversion is allowed downtown without tremendous process,” said Daniel Sider, chief of staff at San Francisco’s Planning Department. Which is true. Shockingly, there are no real regulatory hurdles at play. We should take advantage of that.
As we approach the two-year mark of COVID, let’s take a serious look at the realities of commercial-to-residential conversion, with an eye toward surfacing solutions that could work for a variety of constituents.
This is a good idea that would work for everyone.
The current situation
Downtown office vacancies are a major concern in San Francisco, where empty streets and struggling restaurants stand in stark contrast to prepandemic realities. Consider that office vacancy rates were 3% downtown before the pandemic. Parts of SoMa are now seeing 30% vacancy rates. Mission Bay offices are upwards of 40% vacant, according to the Office of the Controller.
That was a key topic of conversation at a Board of Supervisors’ Land Use and Transportation Committee hearing this week. Supervisor Ahsha Safaí called for an update a year after the supes’ last look at downtown office space. The basic takeaway? We’re in the same place or worse than we were a year ago.
Office workers are not coming back, as expected. Omicron threw us a temporary curve, but that’s not the core issue. Large downtown tenants are embracing the hybrid work model in a big way. It’s clear the old days are not coming back, especially here.
“One of the things that is making office vacancy stubborn in San Francisco is the slow return to work,” said The City’s chief economist, Ted Egan. “San Francisco is fairly consistently near the bottom of other large metro areas in terms of the number of people coming to work.”
At the same time, commercial real estate rents remain stable. They took a big hit in 2020, but stayed relatively the same in 2021. That tells me the market is in a wait-and-see mode. Building owners are going to see if the workers come back before making decisions on their office investments.
Let me help them with this. The workers aren’t coming back. At least not all of them.
As Supervisor Aaron Peskin put it in the supes hearing, “We’re gonna have to rethink our jobs-housing balance.”
Why converting offices is a bad idea
The simple answer is money.
The cost of converting commercial real estate to residential is prohibitive, with estimates ranging from $500 to $5,000 per square foot, according to a report from FortuneBuilders, a real estate consultancy. That’s been the general analysis for years. Many office buildings are not even candidates. Issues surrounding plumbing and windows and egress all come into play. None of the solutions are cheap.
“It’s ultimately a question of dollars and cents,” said Sider. “Those buildings are worth a lot of money. First, you have to buy them. And the cost of conversion is very, very high. You put those two things together, in our experience, you just don’t see the applications…”
Indeed, San Francisco currently has zero conversion applications filed.
The second strike against conversions goes back to market prognosis. San Francisco’s commercial real estate owners and brokers truly believe the market will rebound in full. And the margins are better on commercial than residential real estate.
“I don’t think we’re gonna see office buildings turn into another use. For one thing, all of the other rents of every other use are also down and there isn’t a promising replacement use for a lot of this space,” said Egan. “So I do think that, in the long run, we’ll be back to having an office-centered economy downtown. But … it could take some time.”
Ah, the concept of time. We’ve waited this thing out for two years, business owners hanging on by a thread, hoping it will all go away.
It hasn’t and it won’t. This pandemic has become endemic and its impact will remain.
Why converting offices is a good idea
I’ll give you three reasons. Housing, housing and housing. It’s a major issue facing The City. We’d be fools not to take advantage of this opportunity. Where else would we find this amount of square footage, adjacent to jobs, retail and public transportation?
Living in the Financial District could be fantastic. I just got back from a trip to Los Angeles, and their downtown has blossomed after a period of conversion and reuse.
San Francisco could do the same. In fact, it has to do the same. In order for the Financial District and SoMa to survive and thrive — and I’m talking about the businesses that inhabit street-level locations — there need to be residents and customers. Large tech firms were given massive tax incentives to flood the streets with office workers and keep the district vibrant. That’s no longer happening. An influx of residential units would infuse the area with consumers invested in the community.
“We know that the pandemic has fundamentally changed how urban office cores operate, likely in permanent ways,” said Laurel Arvanitidis, San Francisco’s director of business development, in her testimony before the supervisors this week. “We need to understand definitively how offices and their employees will operate in the new normal left in the wake of the pandemic. What will this mean for the ecosystem of businesses and our office core? And what initiatives can The City implement in order to preserve the vibrancy of our economic engine?”
Now we’re getting somewhere. Let’s talk about how this can be done.
Solutions that would stimulate conversions
San Francisco would do well to look at other cities that have provided innovative tax incentives and regulatory relief to spur conversions. In Los Angeles, an “Adaptive Reuse Ordinance encourages developers to convert older buildings into new developments by providing incentives such as faster entitlements and reduced development fees,” according to a paper published in USC’s law journal.
And guess what? It worked. People are living downtown and even walking to work. In LA!
“It’s an interesting point of view to say that government has a role to play in this dynamic,” said Manan Shah, principal and managing director Gensler, Oakland. The architectural firm has worked on and studied such conversions for years. “There may be an opportunity present. We may be able to stimulate some portions of the market to convert. That’s a real solution.”
Shah’s firm has developed a tool that quickly analyzes whether a building is suitable for conversion. He says the best candidates are older buildings, which are usually Class B or Class C properties that have a smaller footprint than modern office high-rises.
Most everyone else I spoke to for this column concurred. To be clear, no one is talking about converting modern high-rise offices, such as the Salesforce Tower. But there are plenty of smaller, older buildings that would make for beautiful apartments. Let’s find them.
“It does exist. Class B and Class C properties are smaller. Their floor plates are smaller. And in most cases, they’d work better for conversions. It’s been bandied about in our office,” said Robert Sammons, senior director of Bay Area research at the commercial real estate firm Cushman & Wakefield. “There’s a lot of older product in the north Financial District that could work for this kind of thing, and maybe in SoMa. They’re beautiful buildings. We need to keep them. It’s been proven in New York City that it works.
“This is a great solution to the (vacancy) problem. Whether it happens or not? Who knows. It’s going to take the city, developers and owners to go forward with it.”
Gensler has had particular success doing such work in Calgary. Again, government played a key role.
“The city of Calgary did in fact come through with money to help stimulate ideas related to conversion, and help motivate developers. I do think government would be helpful. Taking some of those costs and administrative hurdles away from folks. That would help getting people to consider these options,” said Shah.
It’s also worked in other cities. A recent report from the RentCafe blog, which tracks apartment trends across the country, shows that 2021 was a record year for office adaptive reuse conversions. By the end of last year, the study shows 21,000 units had been repurposed into housing, with about 40% coming from former office buildings.
The trend is expected to continue in 2022, with more than 52,700 units expected to come online.
Philadelphia, Washington, D.C., Cleveland, Chicago and Los Angeles are leading the way in these conversions. San Francisco is not participating in the trend, although one might look at the ongoing conversion of the former I. Magnin building on Union Square, which will combine retail, office and residential, as a hopeful sign.
Ralph Zucker is the president of Somerset Development, a development firm based in Holmdel, New Jersey. He’s done a lot of this kind of work, including repurposing what used to be Bell Labs into a mixed-use paradise. He’s another strong believer that government holds the keys to success in these situations.
“You’re not going to reduce the cost of construction,” said Zucker. “What the municipality can do is incentivize people through the tax rate. All of the projects we’ve done have benefited from tax incentives. Those are crucial. If the City of San Francisco would want to incentivize development, and create a tax structure that was beneficial to converting commercial to residential, that would go a long way.”
So, what do you say San Francisco? Can we do this? I asked Anne Taupier, Mayor London Breed’s director of development in The City’s office of economic and workforce development. She’s on board.
“We need to be looking at all of our solutions. We need to look at any angles to promote mixed use downtown, providing clear paths for developers,” said Taupier. “We’re not going to see the 10 hours a day, five days a week office activation we’ve seen in the past. This is a great opportunity to look at mixed use downtown. But it takes enormous investment.”
“I think it’s on all of us. We need to come up with good ideas that will get past the political smell test. It’s not an easy sell to incentivize, but we should be having that conversation. I don’t want downtown to become a complete crisis, like what happened in Detroit,” she said.
This is a good idea. Free of charge. Let’s take the long view here, San Francisco. Plan for a future that includes a vibrant downtown.
Editor’s note: Welcome to The Arena, a column from The Examiner’s Al Saracevic in which he explores San Francisco’s playing field, from politics and technology to sports and culture. Send your tips, quips and quotes to firstname.lastname@example.org