More than five years after San Francisco’s tech workers packed up their laptops and went remote amid the COVID-19 pandemic, the city remains saddled with millions of square feet of empty office space. New construction has dipped to record lows.
So when the global developer Hines submitted plans last week to build the tallest skyscraper on the West Coast, it inspired some head-scratching.
“We don’t need more office space and skyscrapers, are you actually serious?” responded one commenter on an Instagram video posted by Mayor Daniel Lurie touting the proposal.
The pitch calls for a 76-story, 1,225-foot tower with 1.6 million square feet of office space. It would replace 77 Beale St., a 34-story building of about 920,000 square feet built in the early 1970s as part of Pacific Gas and Electric's headquarters complex. The utility sold the seven-building, block-long site to Hines for $800 million in 2021 upon relocating across the bay to Oakland.
San Francisco's office vacancy rate remains among the highest in the nation. Across the country, office construction levels are at historic lows, while CBRE predicts office conversions and demolitions this year will exceed new office construction for the first time in decades.
While some residents may not see the benefit of a gleaming new office tower during this period of diminished demand, real estate brokers and officials say the Hines proposal is a strong vote of confidence for the city, and it has the potential to help catapult the region back to its pre-pandemic standing as one of the strongest office markets in the world.
“I love the idea,” said Mark McGranahan, a principal at Avison-Young and a veteran of the Bay Area commercial real estate market, articulating a popular view among real estate specialists that the proposal is right in line with the city's historic tendency to embrace ambitious new developments.
“The future of San Francisco has to be bigger and bolder, and we have to pivot to those sorts of projects,” McGranahan said. “A lot of people want to be in the best spaces.”
Defying skeptics
When it comes to San Francisco, Hines has a track record of defying skepticism with ambitious real estate proposals.
In the early 2000s, when the company began pitching a signature skyscraper to help redevelop a neglected area of downtown known as the Transbay District surrounding a bus depot, critics wrung their hands about the attempted “Manhattanization” of San Francisco. And there were concerns about the feasibility of building the tallest and most expensive skyscraper in city history while it was still suffering from the economic doldrums of the Great Recession. Hines won final approval for the project anyway in 2012, and 1,070-foot Salesforce Tower became a symbol of San Francisco’s thriving tech economy.
If built, the new office building will dwarf other buildings downtown, including 61-story Salesforce Tower, which Texas-based Hines sold in 2019. In addition to demolishing 77 Beale St., Hine intends to renovate two century-old office buildings at 215 and 245 Market St. and convert most of a historic structure built in the 1940s at 25 Beale St. to 120 residential units, while adding open space, restaurants and shops.
The proposal supplants a plan to build an 85-story tower on the site with more than 800 homes — more than 100 of which were earmarked as affordable — within blocks of ferry service and public transit. That plan envisioned a “high-performance live-work-play campus."
The developer did not elaborate on its reasons for the shift in plans, but a Hines spokesperson said in a statement to CoStar News that the new project “encapsulates Hines’ belief in the strength of the San Francisco real estate market in the coming years.”
“We look forward to working closely with the city and community stakeholders during this period and steering the development forward into its next chapter as a top-quality, innovative project that will be a significant, long-term investment towards the revitalization of downtown San Francisco,” the spokesperson said.
San Francisco saw its office vacancy rate rise from the lowest in the nation in 2019 to the highest in 2023, as a combination of lockdowns, remote work and layoffs among technology companies caused tenants to downsize at record levels. A gradual recovery is now taking hold, but the office vacancy rate is still among the highest in the nation at around 23%, compared to 6% at the height of the boom.
Artificial intelligence companies have expanded their collective footprint in the city to more than 5 million square feet over the past couple of years, according to data from CBRE, and the sector has the potential to stretch beyond 21 million square feet over the next half decade. If that demand materializes, it has the potential to cut San Francisco’s record-high vacancy rate by about half.
Tallest on the West Coast
The proposed Hines building — which would be 125 feet taller than the 1,100-foot Wilshire Grand Center in Los Angeles, the tallest building on the West Coast — would feature great views and be within blocks of public transit. That's similar to developer Michael Shvo’s renovated Transamerica Pyramid, which has commanded rents that have made it the third priciest office building in the United States, behind only the One Vanderbilt and 425 Park towers, both in Manhattan.
“The best of the best buildings are far outperforming the market overall,” said Robert Sammons, a senior research director at Cushman & Wakefield. “It’s about location and lots of light and amenities.”
Some landlords have spent lavishly on outfitting office buildings with extras from food and beverage offerings reminiscent of five-star hotels to state-of-the-art fitness and wellness facilities.
Much of San Francisco’s office stock was built during the 1980s or before, with swaths of empty or largely empty buildings that experts consider functionally obsolete, with outdated floor plans and systems that can’t accommodate modern workplaces.
Officials and developers hope that some of that real estate will be converted into much-needed housing or demolished, which could help bring down the city’s office vacancy rate. “By 2030 or so, this market could look very different,” Sammons said. “This is good news, in that it really boosts the feeling that we are coming back.”
Live, work, play
Leigh Lutenski, director of joint development at the city’s Office of Economic and Workforce Development, said the Hines proposal is “more than just a single tall office building.” She said it “furthers exactly what we’ve been trying to see downtown, which is a mix of uses where people can live, work, recreate and be entertained."
San Francisco is supposed to build 82,000 housing units by 2031 to meet state mandates to help solve California’s housing shortage. But despite a slew of measures by local and state officials that are supposed to result in more housing development, no construction cranes loom over the city’s skyline. By the end of last year, the city was just 9% of the way to meeting its eight-year target for new housing.
Developers say the kind of dense, transit-oriented new homes that are needed simply aren’t profitable to build given construction costs and current interest rate levels.
While the previous project proposed by Hines called for many more homes, it was much less ambitious than the firm’s new proposal. The company said a timeline for the project's construction would be determined once it is approved by city officials.
The mayor, for one, has responded with unmitigated enthusiasm: “It is a signal to the world that San Francisco is on the rise!” he said.