San Franciscans are fed up with vacant real estate sitting unused.
A recent Chamber of Commerce poll found that 87% of voters favor “transforming underused malls and stores” to “revitalize downtown.” At an event Wednesday with the city’s business elite, Mayor Daniel Lurie bragged about how he and the Board of Supervisors are meeting that demand.
The mayor pointed to an ordinance that passed the day before with a 9-2 vote that would exempt certain conversion projects from development impact fees, inclusionary housing fees and would remove application deadlines.
The city’s analysis found that those fees — which fund infrastructure improvements and affordable housing development — add $70,000 to $90,000 in additional construction costs to each new housing unit.
“Transforming vacant offices into housing will help drive our recovery downtown while creating new homes for San Franciscans,” Lurie said. “This is a win-win for our city.”
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Conversions have long been touted as an obvious solution to the twin challenges of a housing shortage and a downtown bereft of office workers. But even with years of a simmering real estate crisis that have led to record-high vacancies and plummeting real estate values, only one San Francisco project has started construction since the pandemic: the Humboldt Building on Market Street.
Developers boil it down to a lack of financing and, ironically, available inventory. Of the city’s nearly 90 million square feet of office space, only 13% of those buildings are viable candidates for conversion, according to the controller’s office.
The ordinance is the latest in a series of steps started by previous administrations which aided private developers by cutting transfer taxes and rezoning blocks of commercial buildings.
“This was the single biggest thing we can do as a city,” Anne Taupier, director of joint development at the Office of Economic and Workforce Development, said of the fee reduction. “Developers are telling us that they can now start looking at building acquisitions. This is a signal to lenders that they can come back to San Francisco. We are worth the risk.”
Next up is creating a special financing district that would essentially freeze property tax values for 30 years, thus guaranteeing more returns for investors. Assemblymember Phil Ting’s AB 2488, which was signed into law last year, has paved the way for this in downtowns across the state.
OEWD has to complete a fiscal and building eligibility analysis for the district to take effect in San Francisco, Taupier said. Then, the Board of Supervisors would have to pass a resolution establishing a governing board for the district.
The final step will be for that body and the Board of Supervisors to approve a finance plan to govern the district’s activities. Taupier said OEWD expects the resolution to be introduced this spring and the finance plan to be adopted by late summer or early fall.
Efforts to incentivize office-to-housing conversions in San Francisco started in earnest in 2023, Taupier said. As new construction crawled to a standstill, OEWD partnered with the Planning Department and private developers to strategize what the city could do to bring down construction costs.
Marc Babsin, president of Emerald Fund, a San Francisco developer that in 2015 converted an insurance office at 100 Van Ness into housing, called the new ordinance a “vital piece of the puzzle” in unfreezing the construction pipeline.
“Today the conversation with lenders is short,” Babsin said. “But with this [slate of reforms], I believe investors are going to see that these projects are more financeable. We’ve reduced the infeasibility gap.”
He added that an office building with the “right characteristics” could be converted to housing for 30% less of the cost of ground-up, high-rise construction. The aforementioned Humboldt Building — which is being redeveloped by Forge’s Richard Hannum and the property’s owner — achieved savings through federal grants and financing that incentivize clean-energy development.
Joy Ou, CEO of Group i, once owned a prime candidate for conversion: the historic Warfield Building at 982 Market St. In 2022, the developer proposed to convert it into 34 apartments.
But Ou said the project never got off the ground because of high costs. This month, the Warfield was sold to the Community Arts Stabilization Trust for $7.3 million. As a result, the property will remain an office building, with public radio station KALW as the anchor tenant.
Ou said that if San Francisco wants to help developers further, the city could take on a more active role providing financing directly. But with a ballooning deficit and an uncertain economy, that idea seems unlikely.
“Finding capital is still tough,” she said. “Lenders have been scarred from the past [five years], and they’re afraid to get burned.”