San Francisco is hoping to clear bureaucratic hurdles and make it easier for developers to convert the city’s record amount of vacant office space into alternative uses such as apartments, joining some other large municipalities in trying to encourage the filling of underused buildings to shore up tax revenue.
Officials proposed an ordinance this week that provides more flexibility in how traditional office properties could be overhauled into potential housing or retail, the latest in a series of strategies San Francisco has adopted in order to reposition the city as it shifts further away from its pre-pandemic focus catering to the tech industry.
Across the country, cities including New York, Chicago and Washington, D.C., are also pursuing initiatives to accommodate the conversion of surplus office space no longer populated by workers.
Empty downtown offices have drawn concern from elected leaders in those cities about declining business from restaurants and stores that provide desperately needed tax revenue.
The Bay Area proposal, which would codify uses such as flexible workspace in the planning code and permit others such as lab space, is aimed at cutting through the red tape that has long plagued the city’s development pipeline.
“We need to make the process easier for getting our buildings active and full,” San Francisco Mayor London Breed said in a statement, adding that any attempt to build new housing or fill empty retail space “shouldn’t be something that requires granting exceptions through lengthy paperwork and exhaustive public hearings. The challenges facing downtown require us to imagine what is possible and create the foundation for a stronger, more resilient future."
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.
Reduced Tax Revenue
But faced with a potential $728 million two-year deficit — much of which has been attributed to significantly lower business and commercial property tax revenues — San Francisco has struggled to rebuild the momentum it had prior to 2020. That's when high-end office space exceeded $100 per square foot and space was in such high demand, companies often leased developments before they had been approved.
Fast forward three years and downtown San Francisco is an echo of what it had been. Most of the city’s workforce continues to work remotely or in an office on an abbreviated basis, according to data collected by the San Francisco Controller’s Office, and tech companies once eager to scoop up large swaths of office space have shed millions of square feet as they adapt to their own pandemic-era realities.
San Francisco’s vacancy rate has shot up to more than 17% from about 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.
“Everyone understands that downtown is in distress," Sujata Srivastava, the head of policy research group SPUR’s San Francisco office, told CoStar News. "This is a different moment, and we’re in a different reality.”
Breed’s office expects the legislation, which needs to clear the city’s planning and building inspection commissions as well as the Board of Supervisors, could be approved within the next several months.
Housing Pivot
From New York to Seattle, city officials and developers are vying to hit two birds with one stone: tackle the record amounts of vacant office space and potentially address worsening housing shortages by converting that space into apartments.
Between 2016 and 2022, about 260 offices across the country were converted to other uses, according to a report from the real estate firm CBRE. That figure is on track to climb this year as office landlords — especially those for older properties with fewer amenities — contend with demand that remains well short of a full recovery.
Apartments have been the most common reuse for outdated office buildings. Since 2016, more than 90 office properties have been converted to housing across the United States’ largest metropolitan areas, according to CBRE. Those projects have collectively changed the space into more than 14,000 rental units.
While San Francisco’s proposed legislation isn’t focused specifically on housing, the code changes would make it easier to speed up potential projects. Older office buildings in the city could be converted into more than 10,000 housing units, according to research from SPUR and the local chapter of the Urban Land Institute.
Some of the changes included in the ordinance would eliminate rules that require office-to-housing conversions to have a certain amount of outdoor space or include a certain percentage of two- and three-bedroom units. It would also get rid of the requirement that proposed conversions have a hearing before the city’s Planning Commission.
Those changes alone could speed up a conversion by as much as 18 months, according to initial Planning Department estimates.