San Francisco officials are pitching new policies that could help developers convert some of the city's plentiful empty office space into new homes as part of statewide affordability concerns.
A new ordinance aims to remove most city-imposed fees for such projects — particularly San Francisco’s so-called inclusionary housing fee — that local developers say are preventing such projects from penciling out. The proposed law passed a first vote of the San Francisco Board of Supervisors this week.
The measure caps more than three years of efforts by city leaders to provide incentives and remove barriers to office-to-residential conversions, an important part of former Mayor London Breed’s efforts to revive the city’s economically troubled downtown.
San Francisco is supposed to build 82,000 housing units by 2031 as part of its plan to meet state-mandated requirements to help solve California’s housing shortage. But despite a slew of measures that are supposed to result in more housing development, there are no construction cranes currently on the city’s skyline. In 2024, just over 1,200 units were completed, according to city data, of about half the 2,593 homes produced in San Francisco in 2023.
Despite leading the nation in office vacancies and housing unaffordability, San Francisco has lagged behind some other U.S. cities that have made more progress in conversion projects.
Many of them have hit on creative ways to overcome the significant structural and financial barriers to repurposing commercial property into living spaces. Washington, D.C., has a planned 5,820 units set to undergo a makeover from office-to-residential, with New York in second place, with 5,215 units in the pipeline, according to a list of the top U.S. metropolitan areas with the most conversion units underway compiled in 2024 by RentCafe and Yardi Systems Inc. Los Angeles comes in fifth with 2,442 units, according to the study. San Francisco doesn’t even make the list.
'Almost there'
In 2024, San Francisco voters approved a ballot measure to eliminate transfer taxes on conversion projects, and Breed unveiled an ambitious “30X30” plan to convert 5 million square feet of office space in 30 buildings by 2030.
Those efforts have so far yielded just one project currently underway: the 124-unit conversion of the Humboldt Bank Building at 785 Market St., which officials hope to eventually hold up as a poster child for similar efforts that could bring badly housing and new life to the city’s formerly humming financial core.
The historic Warfield Building at 988 Market St. was also set to be transformed into apartments, but the project fell through after it failed to obtain a construction loan. The building is now set to become a hub for arts groups.
The new legislation, first introduced last year by Breed and Supervisor Matt Dorsey, would except office-to-housing conversions in the greater downtown area from fees that currently add an estimated $70,000 per unit to project costs. It would also create a “downtown revitalization and economic recovery financing district” that would allow developers to borrow against future tax revenue to finance construction. The bill is still pending a second vote that could happen as soon as next week, according to the city.
Developers believe the changes could finally tip potential profit margins for such conversions into positive territory. San Francisco’s Emerald Fund, a local developer, has some experience with such projects, having a decade ago repurposed 100 Van Ness Ave., an office building on a main commercial thoroughfare, into more than 400 apartments. The firm’s president, Marc Babsin, said rising interest rates and construction costs mean the project would now cost some 70% more than it did a decade ago, though rents have remained about the same in San Francisco.
The firm has undertaken a detailed study of 15 office properties in and around the downtown area that are good candidates to repurpose into places for people to live, but none of them penciled out financially. Babsin said the new legislation removing fees and tax expenses via the special financing district could change that calculation for some of them. Many of the half-empty office buildings in the city’s Financial District are situated steps from multiple public transit lines and the city’s rich waterfront filled with restaurants and shops, meaning they’re well suited to sustainable residential development.
“These are the three levers that we believe you have to pull to get into feasibility territory,” Babsin told CoStar News. “We are almost there.”
Adaptive re-use boom
Mayor Daniel Lurie, an heir to the Levi-Strauss fortune who took office last month promising to boost business and cut government red tape — blamed “financial and bureaucratic hurdles” for San Francisco’s failure to enable such adaptive reuse efforts.
“Even projects that had been previously approved have been unable to start construction due to high fees and prohibitive development costs, leaving communities with empty buildings,” wrote Lurie’s office in a press release. He said the new measures marked a “new era of cooperation at City Hall.”
A flurry of recent leasing activity and enthusiasm around artificial intelligence startups has spurred hopes for a commercial real estate recovery, but developers and officials acknowledge that the city may never return to the pre-COVID 19 boom days of 6% office vacancy, and it must find other uses for San Francisco’s 51 million square feet of empty office space.
Currently, San Francisco’s vacancy rate stands at more than 23%, “the highest in the nation by a considerable margin,” according to CoStar data, as only a fraction of the tech workers who filled the city’s downtown office buildings before the pandemic — at least on weekdays, during business hours — have returned.
“Demand for commercial space is not coming back in downtown San Francisco, it hasn’t come back since the pandemic,” said Louis Mirante of the Bay Area Council, a policy group, during a recent discussion of the new conversion measures at a meeting of the Board of Supervisors’ Land Use and Transportation Committee. “We need new strategies for bringing people back to downtown.”
Conversions of all stripes will become legitimate ways to repurpose buildings that were originally constructed for another purpose, according to the 2025 Design Forecast from San Francisco-based Gensler, the world’s largest architecture firm. The company even devised an algorithm that evaluates properties’ suitability levels for such conversions based on factors including walkability, access to public transit, a building's shape and floor plan, and the availability of on-site parking.
“The adaptive reuse boom is poised to create valuable new real estate beyond just office-to-residential conversion,” Gensler said, naming retail-to-healthcare, retail-to-sports, office-to-senior living and office-to-science labs as potential conversion types.