San Francisco is determined to convert some of its 51 million square feet of empty office space into housing the city says it desperately needs.
City officials are floating legislation that aims to establish a special tax financing district to help offset the costs of such projects. It's the next step in a series of moves the city hopes will together promote the creation of thousands of new housing units through conversions over the next several years.
The district would make it easier for such projects to pencil for developers by diverting the increased property tax revenue they generate to help pay for construction and development costs. The strategy aims to “improve the feasibility of these challenging projects,” in and around the city’s downtown, where much of its empty office space is concentrated, explained a press release from the city’s Office of Economic and Workforce Development and Mayor Daniel Lurie, who introduced the bill this week with Board of Supervisors President Rafael Mandelman.
The special tax district “is one element of the city’s broader strategy to unleash the potential of underused buildings,” said Mandelman in a statement.
The measure is part of a concerted effort by the city — and others across the country — to solve a quandary that’s central to many of the challenges plaguing San Francisco’s commercial center in the post-COVID-19 era: The city has plenty of empty office space and not enough housing.
Despite leading the nation in office vacancies and housing unaffordability, San Francisco has lagged behind other U.S. cities that have been successful enabling such office-to-housing conversion projects, such as Washington, D.C., Los Angeles and New York, which have hit on creative ways to overcome structural and financial barriers to repurposing commercial property into living spaces.
The city moved in February 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 measures cap more than three years of efforts by city leaders to provide incentives and remove barriers to office-to-residential conversions, which were also central to former Mayor London Breed’s efforts to revive the city’s economically troubled downtown.
No cranes
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.
After more than three years of trying to enable office-to-housing conversions, San Francisco has just one project currently underway to show for its trouble: the 124 homes planned for the former Humboldt Bank building on Market Street. Forge Development Partners is behind the conversion.
That is largely because the math behind office-to-residential projects is challenged in San Francisco as residential rents are still not lucrative enough to cover the costs of converting buildings. Officials hope to hold it up as a poster child for similar efforts that could bring much-need housing and new life to the city’s formerly humming financial core.
Marc Babsin, president of San Francisco developer Emerald Fund, 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.
According to the city, a preliminary analysis has identified around 1,200 eligible properties within the proposed district, which includes the Market Street corridor from San Francisco’s waterfront to the Financial District, the premier Union Square shopping district and other downtown neighborhoods. Officials argue that a similar tax incentive in New York led to the conversion of obsolete office space into some 12,000 units in lower Manhattan over 10 years from the late 1990s to early 2000s.
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.
“Combined with the city’s prior efforts to reduce impact fees and transfer taxes on conversions, we anticipate that the creation of this financing district will lead directly to the conversion of numerous downtown office buildings into much needed housing, which will bring energy and activation to the streets of downtown San Francisco,” said Babsin in a statement.