To reduce the costs associated with complicated office conversion redevelopments, San Francisco Mayor London Breed said she would propose a ballot measure that would waive the city’s transfer tax on buildings that have been overhauled into new residential uses.
Aimed at boosting the development pipeline and sluggish economic recovery, Breed's move to address concerns over high costs associated with conversion projects by proposing to eliminate the typically pricey taxes required whenever a commercial building trades hands. The measure, expected to go before voters in the March 2024 election, needs a simple majority to take effect.
"We are working to do everything we can to support a more diverse and dynamic future for downtown San Francisco," Breed said in a statement to CoStar News. "By removing barriers to converting office to housing, we can take vacant space, turn them into homes, and bring more people into downtown, which is good for our neighborhoods and our small businesses."
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San Francisco's current transfer tax rate for properties that sell for upwards of $25 million is 6%, the highest among any other major city in California.
To qualify for the proposed tax break, the property owner would be limited to 5 million square feet of converted office space, which amounts to a bit more than 5.5% of the city's entire office supply. They would also be required to have any conversion plans approved by the city's Planning Department before the end of 2029. Developers would also have to line up all necessary building permits within three years of approval.
If passed, the tax waiver would only be applicable the first time a property sells and not available if it trades a second time. Transfer taxes would still apply for nonconverted properties.
City officials say that waiving the transfer tax is a critical source of leverage they have to help conversion projects pencil out and become economically feasible.
The proposed waiver comes several months after the Planning Department and Office of Economic and Workforce Development issued a request for information to scout potential redevelopment sites and gauge how feasible those projects would be as well as what is needed to clear any regulatory hurdles. Eight property owners responded, many of whom said that the high development costs associated with conversion projects presented a barrier that was difficult to overcome.
The move coincides with recent ordinances approved by the San Francisco Board of Supervisors to help support the city's economic revitalization after years of depressed leasing activity, nonexistent sales momentum, and an exodus of office and retail tenants. Local officials are hoping to not only streamline the redevelopment process for developers and property owners but also figure out how to focus the city's efforts to make them a reality.
'Essential Strategy'
City leaders across the country have opened up to the idea of converting one property use to another to adapt to changes wrought by the pandemic over the past several years. The notion of repositioning empty buildings into alternative uses such as housing, research and development space, or even hotel rooms has been discussed in markets such as New York, Chicago, Los Angeles and Washington, D.C.
The issue has attracted more attention recently as the demand for office space, in particular, has softened and the need for more affordable housing options has increased.
Office conditions in San Francisco are especially dire compared with other cities across the United States, however, with office vacancy rates shooting beyond 17% compared to roughly 7% in 2019, according to CoStar data. In some pockets of downtown, the availability rate has surpassed 30%, and with leasing activity largely muted, there are no signs of an imminent turnaround.
About 40% of buildings in San Francisco’s downtown would be suitable candidates for conversion due to factors such as building size, configuration and transit proximity, according to a recent report from the San Francisco Bay Area Planning and Urban Research Association. Converting those buildings is estimated to yield roughly 14,000 housing units, a possibility officials say they can't ignore for a city contending with millions of square feet of unused office space as well as an increasingly severe housing shortage.
Even if the proposed ballot measure is approved, however, there is still a mix of hurdles that could complicate developers' efforts to convert office space into other, higher-demand uses. Rising construction costs and interest rates, for example, are both factors beyond the city's control.
But with as much as 25% of San Francisco's lower-tier office properties on the verge of becoming obsolete, Breed and other legislators are working quickly to avoid that scenario and help the city boomerang back to pre-pandemic levels of activity.
“Transforming obsolete offices into housing is one essential strategy to diversify and revitalize San Francisco's downtown, making it a more dynamic district while supporting struggling small businesses,” Sujata Srivastava, SPUR’s planning and housing director, said in a statement. “This brings us one step closer to creating thousands of new homes and adding vibrancy downtown.”