With the desire for office-to-residential conversions in San Francisco seemingly higher than ever, voters are being asked Tuesday whether the city should offer tax breaks for projects that turn commercial buildings into housing.
Despite being one of the nation’s poster children for office vacancies and housing unaffordability, San Francisco doesn’t even crack the list of the top 20 U.S. metro areas with the most conversion units in the pipeline compiled by RentCafe and Yardi Systems Inc.
That puts it behind major cities like New York, Los Angeles and Washington, D.C., as well as smaller regional cities like Charlotte, North Carolina; Hartford, Connecticut; and Birmingham, Alabama.
San Francisco’s Proposition C, introduced by Mayor London Breed, aims to grease the wheels by waiving the transfer tax on any property converted from commercial to residential use when it is sold for the first time.
An analysis published by the Controller’s Office cited research from Moody’s showing that 13% of office buildings in the city were viable candidates for conversion. However, the report said that even if passed Prop. C, would likely not offer enough incentives to get such projects off the ground.
An ordinance passed to change the city's codes to relax rules for conversion projects has had little impact thus far.
So what are other cities doing that San Francisco is not?
Washington, D.C., sits atop the rankings with 5,820 conversion units currently in the pipeline, compared with only 150 units across the entire San Francisco Bay Area, according to Yardi data.
The nation’s capital was more proactive in passing tax breaks, making development more profitable for real estate investors, according to Doug Ressler, manager of business intelligence at Yardi. Washington Mayor Muriel Bowser helped spearhead an expansion to a 20-year tax abatement for conversions as part of her 2024 budget plan.
New York, which came in second in office-to-residential conversions with 5,215 units in the pipeline, launched an Office Conversion Accelerator, which has enrolled more than 50 buildings in a program to give developers a single point of contact to provide expedited zoning and permitting reviews.
In some situations, it can come down to the types of buildings that are available, said Ressler. In Los Angeles, for example, a single developer, Jamison Realty, is pursuing the bulk of the city’s residential conversions. Rather than selling off projects for redevelopment, Jamison is working on transforming properties it already owns. Most of its projects are office buildings that have been vacated or are struggling with occupancy.
Family-owned Jamison was founded by a South Korean immigrant, David Lee, who made his name buying up struggling office towers after the 1992 L.A. riots. In 2013, his family began experimenting with office-to-housing conversions and has since carved out a lane as experts.
“Jamison was doing those irrespective of what the local government was up to,” said Jason Ward, a RAND Corporation economist who has researched the feasibility of commercial-to-residential conversions.
A Jamison representative declined to comment.
That doesn’t mean Los Angeles was sitting on its hands, though. In recent years, LA has also started to roll back certain building and application requirements to fast-track more housing development.
Separately from Prop. C, state Sen. Scott Weiner recently introduced SB 1227, which would allow developers in downtown San Francisco to skip environmental checks to remodel or replace outdated buildings faster.
“You don’t always have to create new policies,” Ward said. “Sometimes, you could help by removing some.”
Conversion challenges
Although some people have put forth a fantasy of converting Salesforce Tower or similar top-tier offices into dorms for a future downtown San Francisco university, the reality is that the costs put the vast majority of such “Class A” office spaces out of reach.
That means the supply of eligible buildings narrows to unused “Class B” offices, or other property types like old warehouses or hotels. For example, the Presidio Landmark was an abandoned hospital before it was converted into a 154-unit luxury apartment building in 2010.
“No one wants to hear it, but when we’re talking about conversions, it truly is a case-by-case exercise,” said Anders Carpenter, an architect at Perkins & Will, who is working on a complete renovation of a century-old skyscraper at 100 McAllister in the Tenderloin.
On top of the usual permitting issues slowing construction projects, those that pursue conversions need to spend extra time studying the arrangement and floor plans of the existing building and factor in time-consuming and expensive seismic upgrades, Carpenter said.
Office-to-housing conversions have been such a hot-button topic recently that one of Carpenter’s colleagues at Perkins & Will, John Long, created his own “adaptive reuse score card” he’s been sharing with developers or building owners who tell him they’re interested in such an undertaking.
To determine whether a prospective project is viable, Long said it’s important to consider not only the building’s “bones” but also whether it is well located near transit and amenities, which will play a role in an investor’s potential return down the road.
Once someone does all of the math, the cost of the conversion has to be cheaper than building something new, Long explained.
According to a study conducted by the urban policy group SPUR presented to a Board of Supervisors committee last year, the average cost of a conversion ranges from $472,000 to $633,000 per unit of housing.
“None of this pencils out unless you are able to reduce the construction costs,” SPUR San Francisco Director Sujata Srivastava told the committee.
All talk and no walk (yet)
Despite the forces working against them, office-to-housing conversions continue to make their way into the housing discourse in San Francisco.
When residents opposed the development of new apartment towers in the city’s northern waterfront last week, a common retort was more or less: Don’t build here when we have a bunch of unused office spaces downtown.
Yet, there are no such projects currently underway, according to Yardi, an asset management company that gathers property information and project proposals nationwide. The last commercial building that was converted into housing in the city was 229 Ellis St., which delivered 56 units of group housing in 2021.
Richard Hannum, a partner at Forge Development Partners, said he’s hoping to change the narrative with the historic Humboldt Building at 785 Market St. The 116-year-old beaux-arts office tower stands 19 stories high and houses a Men’s Wearhouse on the ground floor.
While Forge has yet to purchase the building, which isn’t publicly listed for sale, Hannum has already announced plans to spend upward of $70 million to convert it into 120 apartments for middle-income renters earning $110,000 to $150,000 annually for a two-person household.
Hannum told The Standard he intends to deliver the conversion project in one year’s time, by March 2025—an eyebrow-raising feat.
He declined to disclose exactly how Forge would finance such a project.