Office-To-Residential Conversions Unlikely To Solve San Francisco’s Woes

The San Francisco Board of Supervisors last week passed an ordinance aimed at reducing office vacancy while boosting the city’s housing supply, but real estate professionals have doubts about the effectiveness of office-to-residential conversions as the answer to the city’s problems.

“[Office conversion] is not going to be the solution,” Grosvenor Senior Vice President of Investment Angela Biggs said as part of Bisnow’s San Francisco State of the Market event at 1170 Harrison St. in San Francisco.

The ordinance outlines changes to the city’s planning code, relaxing rules for conversion projects by eliminating zoning restrictions, simplifying the permitting process and eliminating requirements for rear yards and bike parking.

Real estate professionals remain skeptical the rule changes will spur significant private sector interest in such conversions.  

“Even if these impact fees get passed, you are still a full 200 grand-per-unit to get to a number that you know pencils, and this is when everybody is scrambling for capital,” Biggs said.

The pandemic-era flight to quality throws a wrench in conversion plans, according to Biggs.

Vacancies are spread unevenly in San Francisco, particularly in buildings with a mixture of Class-A, B and C offices. In those buildings, Class-A space is typically occupied, but less desirable properties remain vacant. That means nearly every building is still producing rents for the owner, particularly as companies are still making rent payments while they attempt to sublease their space.  

“Economically, it’s still fine,” Biggs said. “But more importantly, if you are going to do a conversion, you will need to empty out the building completely.”

In other words, the office-to-residential conversion could work under a scenario in which vacancies are distributed evenly throughout the downtown office sector, but since they are not, no building stands out as a viable option. 

The nonviability of office-to-residential conversion brought near-consensus among the real estate professionals in attendance. 

“An unnamed person has been talking about 350 California as a conversion — physically it wouldn’t work, period,” SKS Partners Managing Partner Paul Stein said. 

Stein’s company bought 350 California St. from Mitsubishi UFJ Financial Group last May for a price tag of $67.5M, a 75% discount from when the property was listed at $250M in 2020.

While the building has a vacancy issue since Union Bank fled the building, Stein said a conversion wouldn’t work due to physical limitations. 

The office conversion ordinance was a major plank of San Francisco Mayor London Breed’s economic recovery program, which also includes tax reform, cutting red tape for small businesses and  rezoning downtown for arts and entertainment in an attempt to diversify the economic base away from a technology sector that has embraced remote and hybrid work policies. 

The almost universal deprecation of the office-to-residential conversion idea by real estate professionals highlights the disconnect between the private sector in San Francisco and city officials. 

“It sounds like to me the ongoing theme is that office-to-residential is probably not very realistic,” Manatt, Phelps & Phillips partner Tara Shabahang said.

Instead, many of the professionals emphasized a need to enhance public safety by attending to unsanitary street conditions and preventing large-scale retail theft while cutting red tape and fees to promote a better business environment. 

Unity Medical Properties CEO David Lynn said some of the stories about the “doom loop” and San Francisco being a dystopia might be hyperbole, but the problems are real and persistent. 

“The user experience, just day to day, walking around the street, doing your shopping, has deteriorated, certainly over the years and certainly since the pandemic, and I think there has to be real change.”

San Francisco Supervisor Matt Dorsey said the city needs to address its raft of public safety problems by hiring more police officers and better allocating where they spend their time. 

“What we’re seeing in San Francisco is a category of lawlessness that is about street conditions,” he said, adding that public intoxication, drug dealing and other street crimes burden the police department to the degree it makes it difficult to respond to the rash of retail thefts. 

Dorsey said he would also propose shifting police precincts so that more officers are dedicated to downtown, where the majority of retail theft is being carried out.

“I am trying to pitch the mayor on creating a downtown commercial core police district,” he said. 

In addition to crime, real estate professionals complained about the cost of doing business in the city. 

“Getting a project entitled in San Francisco is a laborious process,” Sares Regis Group of Northern California Senior Vice President Keith Brown said.

City officials in attendance acknowledged red tape issues and vowed to make the process smoother. 

“We have got to get out of the way where we can and lean in and support where we can,” city of San Francisco Director of Development Ann Taupier said.

For Briggs, San Francisco must work to attract firms and workers rather than taking their desire to work and live in the city as a given. 

“We are so used to San Francisco being a buyer’s market where the question was ‘What can you do for me?’” she said. “Now, we have to shift our mentality to being a seller’s market. We’re selling people on coming to San Francisco.”

But that sales pitch will likely exclude widespread conversions of office space into housing despite recent policy enactments.  

"That is just going to be a challenge and it's not the solution," Briggs said.