San Francisco’s 183K SF Office Development Cap Isn’t Top Of Mind For Builders, Yet

The city of San Francisco has said it will only approve 183K SF worth of large office projects this year, but developers aren’t concerned.

At least not yet.

“While the commercial real estate industry isn’t supportive of this mechanism to reduce the amount of office space that can be developed, given the condition of the office market, there isn’t much demand for new development in San Francisco,” Colin Yasukochi, executive director of CBRE’s Tech Insights Center, told Bisnow. “So while this cap isn’t that relevant to developers today, it will certainly limit development in the long term.”

The city has been capping office development approvals, or what the city calls allocations, at 875K SF each year since 1986. A new measure that went into effect last year further limits those allocations by linking affordable housing construction with development of large office projects, which are defined as developments larger than 50K SF.

If the city doesn’t meet annual goals for affordable housing production, office development is capped in turn.

That is exactly what happened in the year ending October 2021. Just 20% of the affordable housing goal of 2,042 units per year was built, and as a result, office allocations were slashed by nearly 80% to 182,856 SF.

Those allocations opened up to developers in mid-October, and have most likely already been snapped up, according to Yasukochi. Last year’s available office allocation of nearly 528K SF was quickly used by just two projects, according to the San Francisco Business Times.

The measure, Proposition E, was sponsored by the Tenants and Owners Development Corp., an affordable housing nonprofit. The proposition also established the Housing Balance Reserve, which holds an unlimited amount of space for office development if developers produce 809 affordable units per 1M SF of new office space. 

TODC argues Prop. E should incentivize developers into increasing the stock of affordable housing in the city, though the measure received pushback from local CRE players and some politicians, according to TechCrunch. State Sen. Scott Wiener called the measure a “dumpster fire” when it was passed last year.

“It’ll reduce $ for affordable housing/transit, cost SF’s general fund billions, push out start-ups/nonprofits & fuel office sprawl,” Wiener said on Twitter.

Despite the small amount that was allocated this year, these new developments aren’t expected to kick off construction soon. Yasukochi said the city has a development pipeline of nearly 10M SF that had been previously allocated for large projects that have yet to kick off construction, largely as a result of the coronavirus pandemic.

“Office demand has not quite returned, and development costs are too high” to make many projects feasible, Yasukochi said.

San Francisco’s vacancy rate of 21% is the highest in the Bay Area, according to CBRE data. Q3 marked the seventh consecutive quarter of net move-outs, with year-to-date net absorption at negative 3.5M SF.

CBRE anticipates the return to office movement to occur in early 2022, with recent leasing activity showing signs of improvement over the prior quarters. There was 2.5M SF of leasing activity in Q3, up 25% from Q2. 

Another positive market sign last quarter came by way of sublease supply, which fell for the first time since the onset of the pandemic. There was 8.6M SF of sublease space available in the city as of Q3. 

The largest San Francisco lease deal this year occurred last month, when mobile banking startup Chime inked a nearly 200K SF deal across six floors at a 48-story office tower owned by Hines.  

“There are some cases where companies have a high-growth trajectory and expect their employees to be working in the office, but these deals aren’t necessarily the norm at this point in time,” Yasukochi said.

Larger deals are being struck more often in Silicon Valley, which counts a vacancy rate of 11.7%, the lowest in the Bay Area.

YouTube was recently approved for a major redevelopment and expansion of its existing headquarters in Silicon Valley suburb San Bruno, where it will build as much as 1.8M SF of new office space through a development agreement reached last week with the city. The first phase is expected to span 450K SF; all told, the campus will run 2.4M SF.