San Francisco has an empty office problem and it starts right here.
In the core of the city's downtown, there is 27.1 million square feet of
empty office space in the city.
And to put that into perspective, let's take a look at San Francisco's largest building, the
recently completed Salesforce Tower.
There are nearly 20 Salesforce towers worth of vacant office space in the city.
San Francisco's downtown is among the most vibrant in California
and across the country.
It's suffering right now.
It's emptier than it has ever been.
And in my experience.
San Francisco and many other parts of the country, we have seen a significant rise in the amount
of vacant space at office buildings.
And it's to a point where we have a pretty big surplus, and that will take
a number of years to be able to work off that excess.
We're never going to get back to what we were before the pandemic.
We're going to be different.
We're going to evolve.
We're going to recreate opportunities that may not have existed in San
Francisco.
San Francisco has close to 90 million square feet of office space inventory and over 27
million of that is currently vacant.
Mayor London Breed has seen this dramatic change while she has been in office.
So San Francisco has a vacancy rate right now at around 25%.
And before the pandemic, it was extremely low and almost nonexistent.
The issue started with the pandemic because prior to the pandemic in the city of San
Francisco, our office vacancy rate was about 4%, which meant that
4% of all the space, the millions and millions of square feet of space that we had in the city
were vacant.
And this issue was costing the city a lot of money.
How has the economy been affected by the empty office spaces in the city?
Well, the economy has had some major impacts.
We are facing an over $700 million budget deficit, mostly as a
result to the challenges around our empty office spaces, as well
as we're seeing businesses close in the financial district.
Historically, a city that thrived off of commuters, San Francisco is no longer that.
It's even referred to as the work-from-home capital of America, with 46% of
workers working from home in 2021, up from 7% in 2019.
With many workers no longer commuting to the city, the local economy continues to suffer and
office vacancies continue to rise.
The city is now experiencing its highest office vacancy rates in nearly 30 years.
And as leases run out, many companies are opting not to renew.
So how does San Francisco solve this problem?
One local legislator suggests tackling two of the city's largest issues head on.
Well, what we can't do is just leave these buildings empty.
That would be bad for our city's downtown.
It would be a total waste.
There are some obvious things that we can look at, where we can meet some of the other needs
that we have and actually solve another problem that we have, and that's our
housing crisis.
San Francisco is tied with Boston as the second most expensive city in the US to rent,
ranking behind only New York City with the median price of a one-bedroom cost in
$3,000 and the average sale price of a home in San Francisco was $1.35
million in November of 2022.
To address this problem, the city has adopted the Housing Element, which requires 82,000
units of housing to be built by 2031.
In order to reach that goal, San Francisco needs to build more than 10,000 units per year
starting in 2023.
But that's proving to be easier said than done.
The system is broken and I have been trying to work with the legislative body of this city
to change it. And sadly, in many instances most of the members
refuse to do so.
In the next eight years, we have to build 82,000 units.
It's going to require that we make some major changes that I know our legislative
body is not going to be open to.
But if they don't, what's going to happen?
State support for affordable housing is going to be taken away.
Tax credits and all the things that we enjoy to support the ability for us to build
housing in the first place in San Francisco is going to be taken away.
We have to get aggressive with building more housing, and that's going to take a lot of hard
and courageous decisions.
With a housing deficit and an office surplus, office-to-residential conversion could potentially
be a long-term solution to address both problems.
This is not a simple thing.
It's not just something you can do for cheap or super easily.
It's a challenging thing to do, but it can be done.
There are over a dozen cities all over the country that are doing it.
It from 2016 to 2021.
There have been 218 office conversions in the U.S., and so far in
2022 there have been 42 completions with 21 underway.
However, 46% of those conversions have been from office-to-lab, with only
17% being converted into multifamily buildings.
The rents that you can get for a life sciences lab space are much higher than
office space, so it makes that conversion financially viable.
We have high demand for residential still, but not at the price that would be
required for a developer to do that from a financial perspective.
In current market conditions, developers lack incentives to build housing, and strict regulatory
policies often mean that affordable housing initiatives need to be government led.
In Calgary, Canada, the government is focusing its conversion efforts on housing.
The city is working with Gensler, one of the world's largest architecture firms, to revive its
downtown core.
Calgary was facing a bit of a crisis with vacancy, so they had to even
pre-COVID an office vacancy of about 38%.
And what that meant was they had around 12 million square feet of empty office buildings and
that was spread across the whole city.
But they wanted a way of looking at it to see really if residential conversion was viable,
then if it was, which neighborhoods would benefit from it most.
Through an algorithm, Gensler found that Calgary had about 6 million square feet of office
buildings that would be good candidates for conversions.
And now the city has started the process of converting its downtown.
Gensler estimates that after the completion of the first batch of office buildings, the downtown
population will increase by 24%.
There's a lot of cities still talking about it, and they actually moved from concept to
action in about three months.
One of the really interesting things that Calgary did a good job of is just making it very clear
and very simple how their program works.
It's two things. You go straight to a building permit and it's $75 a square foot
and I can explain it in 10 seconds.
Calgary is just one of many examples of office conversion efforts taking place today in the
U.S., New York City, Detroit and even Kansas City have all launched similar
initiatives. So could we see something similar in San Francisco?
San Francisco in particular, I think actually has a real opportunity to do
something like this because you have an office market which is seeing an increase in
vacancy, especially around the corner, and you're actually seeing a housing market that is
maintaining strength.
People have been talking about a housing crisis in San Francisco for a long time, and this is a
good way of slightly redressing that balance.
Has the city received applications to convert specifically from office to residential?
Not at this time, but we are working and engaging with the business
community to help them to understand what is possible.
I think that there are a lot of businesses, property owners in particular, who were not
completely aware of how easy it could be to convert.
And projects like this have taken place in San Francisco before.
We met with Mark Babsin, the president of Emerald Fund, at 100 Van Ness, an apartment building
that his firm converted from an office.
We have been developing housing in San Francisco since 1979, 100 Van
Ness is a 1972 office tower.
400 feet tall, over 400,000 square feet of office that Triple A owned and
operated for many years. We took over in 2011 and then from 2012
to 2015, converted the building from office to residential.
And often undertook the biggest residential conversion in the city to date.
Building 418 new units of housing and its conversion was largely driven by conditions
similar to what we see today.
This was an outgrowth of the Great Recession, and for three years they were unable to sign any new
leases and you had a 35% vacancy rate, much like today in the
area in the Civic Center area.
We evaluated what makes more sense converting the building to residential or keeping it as
office, and our analysis said to convert it to residential.
While the decision to convert the building was easy, the actual project was a big undertaking.
I think it caused us, I think that our construction costs were somewhere in $125 million
range, which is less, much less than it would cost today.
We decided to strip down the building.
The building was at that time 40 years old.
And so the mechanical, the electrical, the plumbing, none of those systems were worth
salvaging.
Office conversions typically take place in older buildings that are often in need of major repair
or remodeling. In these cases, developers are already at a point where they are investing
dollars into costly upgrade.
While an office-to-residential conversion may require the stripping of a building, in most
cases, it's still much cheaper than building from the ground up.
We're finding them in general to be about 30% less than the cost of doing a ground up
building. Obviously, you're maintaining the existing structure.
In some cases you're maintaining parts of the existing facade.
While office-to-residential conversions can be a cheaper alternative.
Many developers have no incentive to build more housing.
Strict housing policies often mean that what would have been a profitable project no longer
is.
The most important thing from a developer standpoint is what makes the most financial sense.
What project works.
There's a lot of things that are standing in the way of converting office to residential.
The biggest one being that the numbers aren't working today, because construction costs are so
high. There are things that the government could do to make it easier.
When building housing.
What are some of the barriers that you see in the city?
I think some of the barriers that we see have a lot to do with
some of the policies that exist.
Additional impact fees, community benefit fees, transportation fees,
like you have these laundry list of fees.
And at the end of the day, the developer and the people who are investing in these projects,
they're going to make sure they make their money.
They pour those expenses into each of the units.
Every time we add another fee or another requirement, that's another expense for the
average everyday San Franciscan and why I think housing has gotten so out of control,
unaffordable in this city.
I think also the barriers are the process and how long it takes to
build housing, all the different requirements.
We have so many laws on the books already in terms of height limitations, in
terms of open space, in terms of number of units, in terms of everything that
you have to do to build.
And then on top of that, we make people go through an insane
process which takes an extremely long time.
San Francisco already has the highest construction cost in the world, with an estimated cost of
$350 per square foot for a high-rise apartment.
When constructing a new building, developers either have to pay an affordable housing fee of
almost $200 per square foot, or meet the inclusionary requirements that require a certain
percentage of below market rate units.
That percentage can be as high as 30%, depending on where construction takes place.
Would the city be open to kind of decreasing that percentage of affordable housing to build housing
in general?
Well, I'm definitely open to it.
We need to be open to that.
The decision is not completely on me, but I plan to propose some decisions that
will help us look at the feasibility.
What makes the most sense, what's fair, what's equitable, and how can we get these
projects done fast, so that we can get this housing built?
And that could mean lowering the affordable housing
requirements for those particular projects to make them desirable.
The city has a housing crisis.
Do you think it matters what type of housing that we are building or do we just need all housing
right now?
We just need all housing.
And I'll tell you, you know, affordable housing sounds good, but
when you go through the process to try and get access to affordable housing in this city, it is
hard and it is really, really challenging.
And the system that we have tried to repair under state and federal law has been
very, very difficult to work under.
And so as far as I'm concerned, we need to be as aggressive as we can to get more
housing built.
The issues are clear and urgent.
And with the Housing Element deadline set for January, San Francisco needs to act quick.
San Francisco is a very resilient city and we see things turn around and
oftentimes turn around very quickly.
Once we work through the economic issues that we have right now, the demand for commercial
real estate could start to grow very quickly.
There could be some great opportunities in the downtown area.
But more importantly, as we see this downtown area start to
evolve and more housing get built there, it's going to be a great neighborhood for people to be
in all throughout the weekend and the evenings.
And so I just think the possibilities are endless.
So we'll see.
We're going through a little bit of rough waters these past couple of years, but San Francisco
will come back, strong.
And I'm looking forward to the innovative solutions, things like conversion of office to
housing to be part of that, the resurgence of San Francisco.