San Francisco officials are moving forward on a bet that converting offices to residential property could help the struggling local economy as the city known for pre-pandemic tech growth now faces record-high office vacancy.
The Planning Department and Office of Economic and Workforce Development issued a request for information in a bid to scout potential redevelopment sites and gauge both how feasible those projects would be as well as what is needed to clear any regulatory hurdles.
The move coincides with recent ordinances the San Francisco Board of Supervisors approved 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.
With the request, 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 in order to make them a reality. To qualify, the request states that respondents must "either have site control, be in discussions with the property owner for a potential purchase, lease, or other investment in the property, or should be a design professional or other authorized representative of a property owner or developer."
City leaders across the country have opened up to the idea of converting one property use to another in order to adapt to changes wrought by the pandemic over the past several years. As the demand for office space, in particular, has softened, 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 situation in San Francisco is relatively dire compared with other cities throughout 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 is nearly 30%, and with leasing activity largely muted, there are no signs of an imminent turnaround.
The combination of remote work, record-high sublease availability and office vacancy rates, as well as worsening socioeconomic conditions, have stewed since the beginning of the pandemic, contributing to a nearly $800 million budget deficit. What's more, office leasing and investment activity is a small fraction of what it was prior to 2020, meaning that source of critical tax revenue is unlikely to return anytime soon.
Challenges in Conversions
While city officials have been discussing ways to encourage alternatives uses for office space, it takes a while before talk turns into action. For example, some office buildings are less adaptable to residential use than others, and such a conversion away from offices can represent a big bet by an owner that remote work will remain as common as it is these days.
Only a narrow set of existing office buildings are truly viable candidates for possible conversions, according to CoStar analysis, and are unlikely to have much of an impact on market fundamentals for either the office or multifamily markets.
Even so, while the city's office market has become a shell of what it previously was, housing demand in the city is still climbing.
Asking rents average nearly $3,050 per month, according to CoStar data, making San Francisco the priciest multifamily market in the United States. By comparison, the city has lost its standing as the nation's priciest office market — it was overtaken by Silicon Valley and pushed to second place — and with its tech-heavy workforce, has the lowest return-to-office metrics of any major market in the nation.
The request and recently approved legislative package are expected to provide more flexibility in how traditional office properties could be overhauled into potential housing or retail and are the latest in a series of strategies San Francisco has adopted to reposition the city as it shifts further away from its pre-pandemic focus catering to the tech industry.
San Francisco leaders say it's worth the effort.
When it comes to the potential for converting office towers to housing, tearing down buildings for new construction and the opportunity to attract startups to establish themselves in the city, “we have to start reimagining what the downtown can be,” Mayor London Breed recently said. "We are opening the door to do more. San Francisco has never had to work hard for tourists or visitors or people who want to shop here, so there have been a lot of limits placed on what people can do in certain pockets of the city. Policies that we've implemented have changed that, so now you can convert some office to housing a lot easier."