San Fran Plays Catch-Up In Bid To Reset Vacant Towers To Residential

Downtown San Francisco’s commercial towers by-the-dozen, once a buzzing throng of new-economy office workers, stand empty. They're looming, silent, massively costly reminders of a city transformed by post-pandemic remote work trends, shifting business priorities, and a damaged public safety reputation.

This protracted office vacancy has prompted city leaders and developers to reimagine these empty high-rise shells to address San Francisco’s pressing housing crisis.

San Francisco — late to the office-to-residential conversion game — joins other cities that have already started down the path toward making encouraging strides toward alleviating two big challenges with a single real estate property makeover strategy.

Mayor Daniel Lurie and several Board of Supervisors members are taking steps to inject residential life into the struggling core with local legislation to create a special tax district that makes office-to-residential conversions more attractive.

For our downtown to be vibrant, it must be a place people want to be 24/7 — that means inviting tourists back, opening new businesses, and, yes, building more homes,” Lurie said in a statement.

San Francisco is now playing catch-up on conversions. In 2022, California passed a financial incentives program for commercial-to-residential conversions.

Los Angeles has become one of the leaders among the top U.S. cities converting office space to residential, while San Francisco has barely budged in its own efforts.

Work started late last year on the Humboldt Bank Building on Market Street, marking the first conversion since the pandemic. The 19th-century building is being converted into 124 apartments.

Not much else is happening, but there’s plenty of opportunity. Wes Powell, an office broker with commercial real estate firm JLL, said there are 35 million square feet of empty office space in San Francisco, adding up to a vacancy rate of more than 35%.

How the Incentives Would Work

Lurie’s latest proposed legislation tacks onto an ordinance passed in February. It would streamline approvals for adaptively reusing office buildings and lower impact fees. City officials estimate that clearing those barriers could cut development costs by $70,000 to $90,000 per unit.

With the taxing district, the city would permit property taxes from the increased value in residential conversions to be put toward development costs. This is a form of tax increment financing in which the city keeps the base tax, and the difference between the base and the new value works as an inducement to offset developers' upfront costs.

If passed, developers could enroll in the program through 2032, and receive tax disbursements for up to 30 years.

San Francisco, like all of California, is difficult and expensive to build in because of regulations and impact fees.

What I want, and we should all want, is for the general public and the citizens, the voters, to see that this is not some give me package, but it's trying to equalize the amount of fees and legislation and costs to make it economically viable,” he said.

How San Francisco Got Here

San Francisco was plugging along before the pandemic. Office buildings brimmed with technology companies, and office vacancy was low in downtown and across the Bay Area. Properties fetched top dollar.

The pandemic triggered an exodus from downtown offices, leaving investors and property owners uncertain about the true value of their buildings. Crime and homelessness going viral made the sudden decay appear worse.

Hybrid work models held, meaning fewer people downtown and less need for office space. Office vacancy rates soared to unprecedented levels, more than tripling pre-pandemic rates to the highest in the country.

Properties began selling at steep discounts or went back to the lender, or both.

Like a lot of cities around the country, the pandemic exposed how obsolete older office buildings had become. They didn’t have the amenities of trophy office buildings, such as cafes, huddle rooms, game rooms, modern furniture and colorful decor to create a more collaborative environment. Vacancy rates in the trophy buildings are far lower.

Howell said the obsolete office product needs to be trimmed and converted to bring more residential space to downtown San Francisco.

San Francisco, as a large downtown central business district, is probably the least residential of any major downtown,” he said. “We have almost no residential, but this is a city that needs this.”

He pointed to Los Angeles, Seattle and New York as having a good residential mix in their downtown areas.

That makes a city a better place to be, to have fun,” he said. “The entertainment is better. The restaurants become better. The cities who have balanced this properly are more vibrant.”