Turning downtown offices into housing isn’t the solution you think it is

Based on social media rumblings, it seems like there’s a big appetite for converting now-empty San Francisco office buildings into housing. Using the Covid-induced vacancies to help solve the city’s housing affordability crisis and meet state mandates to plan for more than 80,000 new units appears to be a no-brainer.

But while San Francisco’s downtown core appears rife with opportunity, with a record 24% of office space currently vacant—particularly within San Francisco’s bread-and-butter industry, tech—the city’s planning department currently has no pending applications for downtown office-to-housing conversions.

Turning offices into homes may seem like an obvious solution to the city’s housing crisis—Elon Musk even jumped into the fray with a (presumably tongue-in-cheek) pitch to turn Twitter’s headquarters into a homeless shelter—but longtime housing developer Oz Erickson cautions that it’s not so simple. 

Erickson is chair of the San Francisco-based development firm Emerald Fund. His company’s 400-foot, 418-unit tower at 100 Van Ness is the most significant project in the last decade to successfully convert downtown office space into housing. 

“It takes a really special building and you have to be willing to give up the current rent of the office space,” said Erickson. “We had an excellent skeleton and it was still quite costly, but way cheaper then than it would be now. It’s hard for me to believe anything pencils nowadays.”

Erickson has built thousands of units across the city over his career, but the conversion posed its fair share of unique challenges. For one, the development team had to remove the massive stone facades that encased the former headquarters of the California State Automobile Association. 

On the plus side for Erickson, the building’s relatively high standard of construction made it an attractive candidate for conversion. And, by reusing an existing structure, the Emerald Fund was able to skirt height limits for residential buildings and fit more units into the project, which raised their profit margin.

When it comes to conversion projects, it’s not the city’s planning process that’s getting in the way. Dan Sider, chief of staff at the San Francisco Planning Department, said a conversion with no complicated exemptions—an optimistic but not unrealistic scenario—wouldn’t even require a planning hearing and could take as little as three to six months to secure approvals. And even those requiring exemptions don’t face many added hurdles.

“The process through our office is fairly straightforward,” Sider said. “The controls are actually set up very well to accommodate housing in the downtown core.”

Jason Ward, a RAND Corporation economist who has studied the feasibility of commercial-to-residential conversions also pointed to an added advantage, particularly in a market like San Francisco: less community opposition. 

“It’s a lesser issue than we’re going to knock down these single-family homes and build a 60-unit building,” Ward said. “It’s already there, it usually has parking and it looks more or less the same as it did before.”

Case in point, developers of The Pacific in Pacific Heights were able to build a 76-unit condo building in a neighborhood with a history of anti-development activism by adapting a former medical office building. 

Here’s the big “why not” when it comes to office-to-housing conversions: Gutting a building and rebuilding the inside as housing is expensive, especially in San Francisco and especially while construction costs are high. 

Asking rents for downtown commercial leases have dropped around 15% from pre-pandemic peaks, but haven’t dipped further because of the relatively long lease terms signed by commercial tenants, as well as market optimism that the return to office will continue at a gradual pace. 

Essentially, the city and the market aren’t convinced that empty offices downtown are here to stay.

“People would need to believe that office uses are going away,” said Louis Cornejo, president and CEO of Urban Group Real Estate. “You talk to 10 people you get 10 different comments. Are we really going to take a chance on our economy based on: ‘Well, it worked for a year or two?’” 

What gets built and what doesn’t comes down to a calculation of dollars and cents. The first issue that’s nearly always raised in discussions about office conversions is seismic retrofitting, which can quickly multiply construction costs. 

Older buildings would have to be gutted entirely. As compared to office space, housing requires more kitchens and bathrooms—and the plumbing and power that comes with them. And then there’s city code that requires that every apartment look out onto an open area and include access to open space like a deck or a rooftop. In the case of 100 Van Ness, the designers added a common rooftop for residents to use. These modifications, Sider said, can be difficult to achieve.

“Most modern office buildings would require a tremendous amount of work,” Sider said.

In some cases, adaptive reuse projects turn into money pits as developers open up the building and find structural issues, environmental damage and other challenges in bringing older buildings up to code. The Brockman Lofts conversion in downtown Los Angeles, for example, saw its budget balloon from $16 million to $40 million and took seven years to complete. 

Trey Clark, the head of U.S. investments for Chinese developer Vanke, said the conversion process to residences also leads to less usable square footage because of the addition of corridors and other living spaces. 

But the considerations of how and whether to rebuild downtown should not be strictly financial, and there are clear benefits to such projects beyond housing, said RAND’s Ward. There is also an environmental and social case for adaptive reuse projects that should be weighed by policymakers thinking through how—or if–they should incentivize these projects, he said. 

These include the environmental benefits of constructing more housing closer to job centers and the desire to activate the city’s downtown core into a more vibrant neighborhood with a greater mix of uses. 

In order to tip the scales toward conversions, experts say developers would need to buy into a new vision of the future of downtown in the post-Covid world. It doesn’t appear the city is pivoting in that direction. Over the past few months, Mayor London Breed has made bringing workers back downtown a key part of her economic recovery strategy. 

“In a way the effect of Covid on real estate prices has yet to fully play out. It’s going to be a while until we see what happens when people start trying to sell these buildings off or if they can’t bring in long-term leases,” Ward said. “In the long term these things will make a more favorable environment for (conversions) but it hasn’t happened as quickly as I might have expected initially.”

So what structures would be the best candidates for conversion? Class A office spaces like Salesforce Tower and the Transamerica Pyramid are generally considered to be out of the question because of market demand and the high existing revenue they bring in. 

That leaves lower-rise, older and less valuable offices with ideal characteristics like modern seismic safety engineering, repetitive floorplates and a narrow and rectangular form that makes it easier to meet light and air requirements for housing.  

While it hasn’t been tried yet in San Francisco, Sider said perhaps the best projects for office-to-housing conversions in terms of design may be group housing—dorm-like buildings where residents share kitchens and common space—because their layouts mirror many current office plans and expensive elements, like plumbing and electricity, may not have to be reconfigured entirely. 

“That works more from an infrastructure perspective—whether it pencils is another question,” Sider said.

Those projects tend to be affordable housing. That’s specifically where San Francisco is falling behind in its state housing target. But Sider said it’s even less likely developers would pursue affordable housing projects for costly conversions because they tend to be less profitable.

For a model of how it could promote these sorts of projects, San Francisco would do well to look south. Los Angeles passed an Adaptive Reuse Ordinance in 1999 that was responsible for helping to build some 14,000 units in the city’s downtown core over two decades by streamlining approvals, removing minimum parking requirements and putting into place alternative building codes. 

Ward noted a few structural factors that set Los Angeles up for a massive wave of conversions, including a ready supply of largely moribund and distressed commercial buildings downtown left by companies moving to more newly constructed buildings.

The rules put in place by the city, including relaxed egress standards in the case of fires and loosened building requirements around seismic retrofitting, meant “a lot of buildings that would have been unaddressable became more feasible,” he added. 

Since then, Los Angeles has proposed an even easier building process to open up more candidates for conversion, removing minimum and average unit size requirements and even exempting certain eligible projects from additional fees. But, like in San Francisco, costs are the biggest barrier. 

As a point of comparison, the average per unit cost in Los Angeles for new housing is around $580,000, one of the highest marks in the state. In San Francisco, that number has breached $700,000.

“These conversions are such a potentially risky process financially that seeing them flourish is probably going to require San Francisco to adopt policies like Los Angeles’ to reduce the uncertainty around costs and timelines,” Ward said. 

Clark, of Chinese developer Vanke, pitched a California version of New York’s 421a affordable housing program as another potential incentive to promote housing development. The policy provides a property tax exemption that lasts for 15 to 25 years to developers who build multifamily residential housing.

There is some work being done at the state level. In California, state officials are trying to ease the pathway for turning underused commercial property into housing. 

Legislation introduced by East Bay State Sen. Bob Wieckowski, would essentially enshrine Los Angeles’ adaptive reuse policy into state law and prohibit a city or county from imposing various requirements on an adaptive reuse project. The bill, SB 1369, also includes a provision to require statewide building standards to facilitate the development of adaptive reuse projects.

Gov. Gavin Newsom also added $100 million in his proposed 2022-23 state budget for adaptive reuse incentive grants that would remove the cost barriers to repurposing commercial and other buildings as housing, with a particular focus on downtown areas. 

Sider said the city’s “hands are tied” on most of the controls that could make building cheaper—like tax incentives or abatements—due to Proposition 13, an amendment to the state constitution that reassesses property when new construction happens. But even if the state were to help, Sider said, government intervention can only go so far. 

“This is one of those things where I think the government has limited powers to cause this to happen,” Sider said. “It really is a function of the dollars and cents here. And construction costs and building typologies are not supportive, at least right now, of these types of conversions.”

If the city’s hands are truly tied in controlling building costs, as they say, there may be an opportunity for intrepid entrepreneurs to take on the challenge. 

San Francisco seed-stage startup Kit Switch is aiming to lower the construction costs for conversion projects by pre-building flexible panels with kitchen and bathroom appliances for quick assembly on site. CEO Armelle Coutant said the inspiration behind Kit Switch was to enable existing structures to be more adaptable to changing needs. 

The company offers upfront pricing for its kits, which cut down on potential cost uncertainties and overruns. It is currently working with Habitat for Humanity in Los Angeles to explore the possibility of turning smaller commercial buildings into affordable housing using the company’s components. 

Kit Switch has yet to have a project in San Francisco, but said they are in conversations with the city’s planning department on how it can potentially utilize their products. As the city stays in its holding pattern waiting to see how Covid and the market shake out, Coutant and her colleagues are building for a future they see as inevitable.

“We are at an inflection point in terms of adaptive reuse, especially emerging from the pandemic as people realize this is an important strategy for the Covid-19 economic recovery and for addressing our housing deficit,” Coutant said.