Propmodo Daily

By Holly Dutton · Feb. 16, 2024

Greetings!

Most major cities in the country are trying to find a way to fill empty office buildings. The negative effect they have on central business districts and the lost property tax revenue that they represent has put them in the crosshairs of city officials across the country. San Francisco is the latest city to create an office-to-resi conversion initiative. We took a look at the city’s new program in today’s email.

Now, let's dig in!

Will City-Backed Office-To-Residential Programs Help Development?

It seems that we have hit an inflection point in the office market. No longer are owners holding empty buildings, hoping that companies will return to work after the pandemic. Almost everyone agrees that some office buildings are just too far gone to save. So now the conversation has shifted to finding ways to develop these obsolete behemoths. 

City officials, looking to turn the tides on their city center and prevent the loss of even more property tax revenue, have touted office-to-resi conversions as a viable option. On the face of it, these conversions come off as a win-win solution to both empty space and the housing shortage. But as we’ve learned, repurposing offices into apartments is a complicated process and doesn’t make sense or pencil out for a lot of buildings. Still, opportunities do exist and have been completed successfully in many places, and San Francisco is one of the most recent cities to roll out a program to help developers through the conversion process.

San Francisco city officials established a Downtown Adaptive Reuse Program, as part of the larger Future of Downtown initiative to assist building owners in converting commercial buildings to residential. A potential candidate for the program must be located in certain districts in the city’s downtown and can receive zoning modifications or be waived from some of the city’s code requirements, like bike parking, open spaces, dwelling unit mix, planning commission hearing, and streetscape and pedestrian improvements. Buildings in the program can even add on to their properties—up to 33 percent additional volume, according to the city. A measure to create a tax incentive for office-to-resi conversions is also in the works and will go to voters in the upcoming March primary. Like so many other cities, including New York, Washington, D.C., Boston, Seattle, and Pittsburgh, the aim with programs like these is to get empty buildings back up and running as fast as possible, but as housing.

San Francisco, a city where office vacancy rates soared north of 35 percent late last year, is arguably the apex of the nation’s office market struggles. It’s a city notorious for its steep cost of living and agonizingly slow development timelines. This new program, meant to help speed up the creation of sorely needed housing, could be a major boon to getting projects done faster. But even if the process is streamlined, how much of a difference could it make? Even with incentives and waivers, it could mean several months to a year before construction begins, and any additional months spent waiting could mean a lot more costs to a developer, especially with a construction loan in a high-interest rate environment. 

San Francisco is facing millions of empty office space, and it will undoubtedly take years to repurpose a good chunk of that space, not all of which even qualifies for conversion, into residential. One San Francisco real estate developer pegged it at a decade. "If you take 5 million out of 25 million, that's a significant percentage, and if you then chew up the remaining space at 2 million square feet per year, you get down to a reasonable number in 10 years," said Oz Erickson, founder, and chairman of the Emerald Fund.

Even in the best-case scenario, one large project still represents a fraction of the empty office space in a market and takes years to complete. In Manhattan, much of the recent conversation around office-to-resi has surrounded 25 Water St., the towering conversion project being undertaken by GFP Real Estate, Metro Loft Management, and Rockwood Capital. Once completed, it’s expected to have a whopping 1,300 residential units. That project started taking shape in 2022 and is projected to open sometime in 2025. But there is another project nearby that began taking shape before the big push for conversions began. The Pearl House is a conversion of a 1970s office building into 588 market-rate units that recently opened to renters. All told the project took three years to complete, and while it’s not affordable housing (neither is 25 Water St.), it is housing nonetheless. 

Office-to-residential conversions are a great option, but they don’t often pencil without some support. Tax abatements and grants have proven to be useful, but it will be an interesting experiment to see whether waving zoning requirements, especially in a restrictive area like San Francisco, can really help spur conversions.

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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