San Francisco has an empty office problem and it
starts right here. In the core of the city's downtown, there is 27.1
million square feet of empty office space in the city. And to put that into perspective, let's take a
look at San Francisco's largest building, the recently completed Salesforce Tower. There are nearly 20 Salesforce towers worth of
vacant office space in the city. San Francisco's downtown is among the most vibrant
in California and across the country. It's suffering right now. It's emptier than it has ever been. And in my experience. San Francisco and many other parts of the country,
we have seen a significant rise in the amount of vacant space at office buildings. And it's to a point where we have a pretty big
surplus, and that will take a number of years to be able to work off that
excess. We're never going to get back to what we were
before the pandemic. We're going to be different. We're going to evolve. We're going to recreate opportunities that may
not have existed in San Francisco. San Francisco has close to 90 million square feet
of office space inventory and over 27 million of that is currently vacant. Mayor London Breed has seen this dramatic change
while she has been in office. So San Francisco has a vacancy rate right now at
around 25%. And before the pandemic, it was extremely low and
almost nonexistent. The issue started with the pandemic because prior
to the pandemic in the city of San Francisco, our office vacancy rate was about 4%,
which meant that 4% of all the space, the millions and millions of
square feet of space that we had in the city were vacant. And this issue was costing the city a lot of
money. How has the economy been affected by the empty
office spaces in the city? Well, the economy has had some major impacts. We are facing an over $700 million budget
deficit, mostly as a result to the challenges around our empty office
spaces, as well as we're seeing businesses close in the financial
district. Historically, a city that thrived off of
commuters, San Francisco is no longer that. It's even referred to as the work-from-home
capital of America, with 46% of workers working from home in 2021, up from 7% in
2019. With many workers no longer commuting to the
city, the local economy continues to suffer and office vacancies continue to rise. The city is now experiencing its highest office
vacancy rates in nearly 30 years. And as leases run out, many companies are opting
not to renew. So how does San Francisco solve this problem? One local legislator suggests tackling two of the
city's largest issues head on. Well, what we can't do is just leave these
buildings empty. That would be bad for our city's downtown. It would be a total waste. There are some obvious things that we can look
at, where we can meet some of the other needs that we have and actually solve another problem
that we have, and that's our housing crisis. San Francisco is tied with Boston as the second
most expensive city in the US to rent, ranking behind only New York City with the median
price of a one-bedroom cost in $3,000 and the average sale price of a home in
San Francisco was $1.35 million in November of 2022. To address this problem, the city has adopted the
Housing Element, which requires 82,000 units of housing to be built by 2031. In order to reach that goal, San Francisco needs
to build more than 10,000 units per year starting in 2023. But that's proving to be easier said than done. The system is broken and I have been trying to
work with the legislative body of this city to change it. And sadly, in many instances most
of the members refuse to do so. In the next eight years, we have to build 82,000
units. It's going to require that we make some major
changes that I know our legislative body is not going to be open to. But if they don't, what's going to happen? State support for affordable housing is going to
be taken away. Tax credits and all the things that we enjoy to
support the ability for us to build housing in the first place in San Francisco is
going to be taken away. We have to get aggressive with building more
housing, and that's going to take a lot of hard and courageous decisions. With a housing deficit and an office surplus,
office-to-residential conversion could potentially be a long-term solution to address both problems. This is not a simple thing. It's not just something you can do for cheap or
super easily. It's a challenging thing to do, but it can be
done. There are over a dozen cities all over the
country that are doing it. It from 2016 to 2021. There have been 218 office conversions in the
U.S., and so far in 2022 there have been 42 completions with 21
underway. However, 46% of those conversions have been from
office-to-lab, with only 17% being converted into multifamily buildings. The rents that you can get for a life sciences lab
space are much higher than office space, so it makes that conversion
financially viable. We have high demand for residential still, but
not at the price that would be required for a developer to do that from a
financial perspective. In current market conditions, developers lack
incentives to build housing, and strict regulatory policies often mean that affordable housing
initiatives need to be government led. In Calgary, Canada, the government is focusing
its conversion efforts on housing. The city is working with Gensler, one of the
world's largest architecture firms, to revive its downtown core. Calgary was facing a bit of a crisis with vacancy,
so they had to even pre-COVID an office vacancy of about 38%. And what that meant was they had around 12
million square feet of empty office buildings and that was spread across the whole city. But they wanted a way of looking at it to see
really if residential conversion was viable, then if it was, which neighborhoods would benefit
from it most. Through an algorithm, Gensler found that Calgary
had about 6 million square feet of office buildings that would be good candidates for
conversions. And now the city has started the process of
converting its downtown. Gensler estimates that after the completion of
the first batch of office buildings, the downtown population will increase by 24%. There's a lot of cities still talking about it,
and they actually moved from concept to action in about three months. One of the really interesting things that Calgary
did a good job of is just making it very clear and very simple how their program works. It's two things. You go straight to a building
permit and it's $75 a square foot and I can explain it in 10 seconds. Calgary is just one of many examples of office
conversion efforts taking place today in the U.S., New York City, Detroit and even Kansas City
have all launched similar initiatives. So could we see something similar in
San Francisco? San Francisco in particular, I think actually has
a real opportunity to do something like this because you have an office
market which is seeing an increase in vacancy, especially around the corner, and you're
actually seeing a housing market that is maintaining strength. People have been talking about a housing crisis
in San Francisco for a long time, and this is a good way of slightly redressing that balance. Has the city received applications to convert
specifically from office to residential? Not at this time, but we are working and engaging
with the business community to help them to understand what is
possible. I think that there are a lot of businesses,
property owners in particular, who were not completely aware of how easy it could be to
convert. And projects like this have taken place in San
Francisco before. We met with Mark Babsin, the president of Emerald
Fund, at 100 Van Ness, an apartment building that his firm converted from an office. We have been developing housing in San Francisco
since 1979, 100 Van Ness is a 1972 office tower. 400 feet tall, over 400,000 square feet of office
that Triple A owned and operated for many years. We took over in 2011 and
then from 2012 to 2015, converted the building from office to
residential. And often undertook the biggest residential
conversion in the city to date. Building 418 new units of housing and its
conversion was largely driven by conditions similar to what we see today. This was an outgrowth of the Great Recession, and
for three years they were unable to sign any new leases and you had a 35% vacancy rate, much like
today in the area in the Civic Center area. We evaluated what makes more sense converting the
building to residential or keeping it as office, and our analysis said to convert it to
residential. While the decision to convert the building was
easy, the actual project was a big undertaking. I think it caused us, I think that our
construction costs were somewhere in $125 million range, which is less, much less than it would
cost today. We decided to strip down the building. The building was at that time 40 years old. And so the mechanical, the electrical, the
plumbing, none of those systems were worth salvaging. Office conversions typically take place in older
buildings that are often in need of major repair or remodeling. In these cases, developers are
already at a point where they are investing dollars into costly upgrade. While an office-to-residential conversion may
require the stripping of a building, in most cases, it's still much cheaper than building from
the ground up. We're finding them in general to be about 30% less
than the cost of doing a ground up building. Obviously, you're maintaining the
existing structure. In some cases you're maintaining parts of the
existing facade. While office-to-residential conversions can be a
cheaper alternative. Many developers have no incentive to build more
housing. Strict housing policies often mean that what
would have been a profitable project no longer is. The most important thing from a developer
standpoint is what makes the most financial sense. What project works. There's a lot of things that are standing in the
way of converting office to residential. The biggest one being that the numbers aren't
working today, because construction costs are so high. There are things that the government could
do to make it easier. When building housing. What are some of the barriers that you see in the
city? I think some of the barriers that we see have a
lot to do with some of the policies that exist. Additional impact fees, community benefit fees,
transportation fees, like you have these laundry list of fees. And at the end of the day, the developer and the
people who are investing in these projects, they're going to make sure they make their money. They pour those expenses into each of the units. Every time we add another fee or another
requirement, that's another expense for the average everyday San Franciscan and why I think
housing has gotten so out of control, unaffordable in this city. I think also the barriers are the process and how
long it takes to build housing, all the different requirements. We have so many laws on the books already in
terms of height limitations, in terms of open space, in terms of number of units,
in terms of everything that you have to do to build. And then on top of that, we make people go
through an insane process which takes an extremely long time. San Francisco already has the highest construction
cost in the world, with an estimated cost of $350 per square foot for a high-rise apartment. When constructing a new building, developers
either have to pay an affordable housing fee of almost $200 per square foot, or meet the
inclusionary requirements that require a certain percentage of below market rate units. That percentage can be as high as 30%, depending
on where construction takes place. Would the city be open to kind of decreasing that
percentage of affordable housing to build housing in general? Well, I'm definitely open to it. We need to be open to that. The decision is not completely on me, but I plan
to propose some decisions that will help us look at the feasibility. What makes the most sense, what's fair, what's
equitable, and how can we get these projects done fast, so that we can get this
housing built? And that could mean lowering the affordable
housing requirements for those particular projects to
make them desirable. The city has a housing crisis. Do you think it matters what type of housing that
we are building or do we just need all housing right now? We just need all housing. And I'll tell you, you know, affordable housing
sounds good, but when you go through the process to try and get
access to affordable housing in this city, it is hard and it is really, really challenging. And the system that we have tried to repair under
state and federal law has been very, very difficult to work under. And so as far as I'm concerned, we need to be as
aggressive as we can to get more housing built. The issues are clear and urgent. And with the Housing Element deadline set for
January, San Francisco needs to act quick. San Francisco is a very resilient city and we see
things turn around and oftentimes turn around very quickly. Once we work through the economic issues that we
have right now, the demand for commercial real estate could start to grow very quickly. There could be some great opportunities in the
downtown area. But more importantly, as we see this downtown
area start to evolve and more housing get built there, it's
going to be a great neighborhood for people to be in all throughout the weekend and the evenings. And so I just think the possibilities are
endless. So we'll see. We're going through a little bit of rough waters
these past couple of years, but San Francisco will come back, strong. And I'm looking forward to the innovative
solutions, things like conversion of office to housing to be part of that, the resurgence of San
Francisco.
