It’s been five years since San Francisco’s office market collapsed, throwing the downtown economy into a tailspin.
More than a third of the city’s stock remains empty, even with a growing artificial intelligence industry bringing in startups. But real estate development is inherently an optimistic venture. That goes part of the way to explaining legislation, introduced Tuesday by Mayor Daniel Lurie and District 3 Supervisor Danny Sauter, meant to help developer Related California finance a project in Jackson Square that would add 375,000 square feet of office space and a luxury hotel.
An office building … in this economy?
Related proposes the construction of two buildings on a block bound by Sansome, Washington, Battery, and Merchant streets. One component is a 41-story mixed-use building with 375,000 square feet of office space atop a 200,000-square-foot hotel. The other building would be a four-story fire station to replace the one currently on the site.
In 2018, the city issued a call for bids to rebuild Fire Station 13 at 530 Sansome St. The idea was to use fees from the project to support the construction of offsite affordable housing several blocks away, at 772 Pacific Ave. in Chinatown.
The redevelopment site is next to the Transamerica Pyramid, which is in the midst of a transformation since its purchase by developer Michael Shvo. Four low-slung structures at 425 Washington St., 439-445 Washington St., 520 Sansome St., and 447 Battery St. would be demolished to make way for the new buildings.
The three-story Jones-Thierbach Coffee Company Building at 447 Battery was designated as a local landmark in 2022. The legislation would rescind the property’s landmark status, allowing for its demolition. It would be replaced with the new fire station, as well as the 41-story tower.
After winning a public bidding process in 2020, Related California was approved a year later to build a 19-story tower atop a new fire station, but that project was deemed economically infeasible.
Who wants to build this?
New York-based Related Companies has built several notable projects in the region, mostly residential complexes, including The Avery luxury condo building in San Francisco. In the region, it is perhaps best known for redeveloping more than 240 acres around Levi’s Stadium in Santa Clara.
That project, known as Related Santa Clara, promised to deliver 5 million square feet of office space, 1,680 residential units, 700 hotel rooms, and a new city center filled with retail and restaurants in time for Super Bowl LX and the 2026 FIFA World Cup. Construction was supposed to start in 2020, but the project was delayed and dramatically scaled down in the wake of the pandemic.
To pay for the San Francisco project, Related is hoping to use a portion of taxes generated by the hotel to offset construction costs. (It would be the first ground-up, five-star hotel built in San Francisco in 30 years.) The new agreement calls for the developer to pay $2 million within six months of approvals and $13 million once construction begins.
Despite the city’s 35.1% office vacancy rate, net absorption has been positive for three consecutive quarters, according to CBRE. That means tenants are leasing more space than they are letting go. This quarter saw the vacancy rate fall by 70 basis points, from 35.8% in the first quarter, the largest decline since 2015.
Real estate sources say the competition for top-tier offices is tighter than what the overall market implies. According to Cushman & Wakefield, the 15 “Tier 1” office buildings in the city, which are either new or completely renovated, have a direct vacancy rate of 7.1%.
Redeveloping the fire house was a priority for Supervisor Aaron Peskin. Prior to leaving office this year, he introduced a resolution that was unanimously adopted by the Board of Supervisors, generally endorsing Related’s amended plan.
In total, the project would require a new development agreement, amendments to the General Plan and Downtown Area Plan, a conditional-use authorization, a large-cap office allocation, and a green light from the Recreation and Park Commission.
Related hopes to obtain approvals for the revised project by October and start construction late next year.
“This is the right project at the right time to set the stage for San Francisco’s future,” Gino Canori, president of Related California, said in a statement.