How San Francisco Can Solve Its Empty Office Problem

Summary

San Francisco is facing an office vacancy crisis, with over 27 million square feet of empty office space downtown. This issue, spurred by the pandemic, has resulted in a $700 million budget deficit, impacting the local economy. A proposed solution is converting vacant offices into residential spaces to address both the office surplus and the housing crisis. While challenging due to high construction costs and regulatory barriers, similar conversions have been successful in other cities. Mayor London Breed emphasizes the need for bold action to solve both problems and revitalize downtown San Francisco.

Takeaways

• 🏢 San Francisco is facing a significant issue with 27.1 million square feet of vacant office space, equivalent to nearly 20 Salesforce Towers.
• 📉 The city's downtown, once vibrant, now suffers from high vacancy rates, with the economy impacted by over $700 million in budget deficits.
• 🔄 The pandemic has drastically changed the office landscape, with a shift towards remote work leading to a surplus of office space that will take years to resolve.
• 🏠 San Francisco's vacancy rate has risen to 25% from a pre-pandemic rate of about 4%, indicating a major shift in the real estate market.
• 💼 The city's historical reliance on commuters has diminished, with 46% of workers working from home in 2021, up from just 7% in 2019.
• 🏗️ To address the housing crisis, San Francisco has adopted the Housing Element, aiming to build 82,000 units by 2031, starting with over 10,000 units per year from 2023.
• 🏙️ Office-to-residential conversion is proposed as a potential solution to both the office vacancy and housing crises, with other U.S. cities successfully implementing similar strategies.
• 💼 The conversion process is complex and costly, with developers often lacking incentives to convert due to high construction costs and strict regulatory policies.
• 🏘️ Calgary, Canada, serves as a model for office conversion, with a streamlined process and government focus on housing, potentially offering insights for San Francisco.
• 🌟 Despite the challenges, there is optimism for San Francisco's recovery, with the potential for innovative solutions like office conversions to play a key role in the city's resurgence.

Q & A

What is the current issue with office spaces in San Francisco?

San Francisco is facing an empty office problem with 27.1 million square feet of vacant office space in the city, which is significantly impacting the economy and local businesses.

How does the vacant office space compare to the size of Salesforce Tower?

There is nearly 20 Salesforce towers worth of vacant office space in San Francisco, highlighting the scale of the issue.

What was the office vacancy rate in San Francisco before the pandemic?

Before the pandemic, San Francisco's office vacancy rate was about 4%, indicating a very low vacancy rate and a healthy commercial real estate market.

What is the current office vacancy rate in San Francisco?

The current office vacancy rate in San Francisco is around 25%, a significant increase from the pre-pandemic rate.

How has the pandemic affected San Francisco's economy in relation to office spaces?

The pandemic has led to a significant rise in vacant office spaces, resulting in an over $700 million budget deficit for the city, primarily due to the challenges around empty office spaces and businesses closing in the financial district.

What is the current state of the work-from-home trend in San Francisco?

San Francisco is referred to as the work-from-home capital of America, with 46% of workers working from home in 2021, up from 7% in 2019, contributing to the rise in office vacancies.

What is San Francisco's strategy to address the housing crisis in relation to the empty office spaces?

San Francisco is considering converting empty office buildings into residential units to address both the housing crisis and the surplus of office spaces.

What is the Housing Element and how does it relate to San Francisco's housing goals?

The Housing Element is a city initiative that requires 82,000 units of housing to be built by 2031, aiming to address the housing crisis by increasing the housing stock.

How does the conversion of office spaces to residential units compare in cost to new construction?

Office-to-residential conversions are generally about 30% less expensive than building from the ground up, making it a more cost-effective solution.

What are some of the barriers to converting office spaces into residential units in San Francisco?

Barriers include high construction costs, strict regulatory policies, and various fees that make the conversion process less financially viable for developers.

What steps is San Francisco taking to encourage the conversion of office spaces to residential units?

San Francisco is engaging with the business community to raise awareness of the possibilities and is considering policy changes, such as lowering affordable housing requirements, to make conversions more attractive.

Outlines

00:00

🏢 San Francisco's Office Space Crisis

San Francisco is facing a significant issue with vacant office space, with 27.1 million square feet lying empty, a surplus that could take years to absorb. The city's downtown, once vibrant, is now struggling with a 25% vacancy rate, a stark contrast to the 4% pre-pandemic rate. The economic impact is severe, with the city facing a budget deficit of over $700 million, largely due to the empty office spaces. The pandemic has accelerated a shift towards remote work, with 46% of San Francisco's workforce working from home in 2021, a significant increase from 7% in 2019. This has led to a decline in local economy and an increase in office vacancies. The city is considering converting these spaces into housing to address the housing crisis, as San Francisco is one of the most expensive cities in the US for renting.

05:02

🏗️ Office-to-Residential Conversion as a Solution

The script discusses the potential conversion of vacant office spaces into residential units as a solution to both the office vacancy and housing crises in San Francisco. Despite the high demand for residential spaces, the conversion is not financially viable at current market rates. The city has adopted the Housing Element, aiming to build 82,000 units by 2031, requiring an annual construction rate of over 10,000 units starting in 2023. However, the process is challenging due to strict regulations and high construction costs. The city is looking at examples like Calgary, Canada, where the government is actively converting office spaces into housing. San Francisco has seen successful conversions in the past, such as the 100 Van Ness project, which turned a 400,000 square feet office tower into 418 new residential units. The city is engaging with the business community to explore the feasibility of such conversions.

10:05

🏙️ Overcoming Barriers to Housing Development

The final paragraph delves into the barriers to converting office spaces into housing in San Francisco. These include high construction costs, various impact fees, and a complex permitting process. The city's construction costs are among the highest globally, and additional fees further increase the cost of housing. The process of building housing is slow and laden with requirements, which delays development. San Francisco's high-rise apartments cost an estimated $350 per square foot to construct. Developers face a choice between paying an affordable housing fee or meeting inclusionary requirements for below-market-rate units. The city is considering reducing affordable housing requirements to make projects more feasible and is open to innovative solutions to address the housing crisis. The city's resilience is highlighted, with optimism for a resurgence driven by economic recovery and strategic development.

Keywords

💡Office vacancy

Office vacancy refers to the unoccupied office space in a commercial building. In the context of the video, San Francisco is experiencing a significant office vacancy problem, with 27.1 million square feet of empty office space, which is likened to nearly 20 Salesforce towers worth of vacant space. This situation is a major concern for the city's economy and downtown vibrancy.

💡Pandemic impact

The pandemic impact refers to the effects of COVID-19 on various sectors, including real estate. The video discusses how the pandemic has led to a rise in vacant office spaces as companies and workers adapted to remote work, causing a significant increase in office vacancy rates in San Francisco, from about 4% pre-pandemic to around 25%.

💡Economic deficit

An economic deficit is a shortfall in a city or country's budget, often due to decreased revenue. The video highlights that San Francisco is facing an over $700 million budget deficit, primarily due to the challenges posed by empty office spaces and businesses closing in the financial district.

💡Work-from-home

Work-from-home is a practice where employees perform their work outside the traditional office or workplace. The video mentions that San Francisco has been referred to as the 'work-from-home capital of America,' with 46% of workers working from home in 2021, up from 7% in 2019, contributing to the rise in office vacancies.

💡Housing crisis

A housing crisis occurs when there is a shortage of affordable housing, leading to high costs and limited availability. The video discusses San Francisco's housing crisis, with the city being the second most expensive in the US to rent and a median price of a one-bedroom apartment at $3,000.

💡Office-to-residential conversion

Office-to-residential conversion is the process of transforming office buildings into residential spaces. The video suggests this as a potential solution to address both the office vacancy and housing crisis in San Francisco, highlighting examples from other cities like Calgary that have successfully undertaken such conversions.

💡Housing Element

The Housing Element is a policy requirement that mandates cities to plan for a certain amount of housing, including affordable units, to meet future needs. The video mentions that San Francisco has adopted the Housing Element, aiming to build 82,000 units by 2031 to address its housing shortage.

💡Construction costs

Construction costs refer to the expenses associated with building or renovating structures. The video discusses how high construction costs are a barrier to converting office spaces into residential units, making such projects financially unattractive for developers.

💡Regulatory policies

Regulatory policies are the rules and guidelines set by governments that influence how businesses operate. The video points out that strict regulatory policies in San Francisco, such as fees and requirements for affordable housing, can make housing development less profitable and more challenging.

💡Inclusionary requirements

Inclusionary requirements are mandates that require a certain percentage of new housing developments to be affordable or below market rate. The video mentions that in San Francisco, developers either have to pay an affordable housing fee or meet inclusionary requirements that can be as high as 30%, affecting the feasibility of new housing projects.

💡Economic resilience

Economic resilience is the ability of a city or region to recover and adapt in the face of economic shocks. The video concludes with an optimistic view of San Francisco's economic resilience, suggesting that innovative solutions like office-to-residential conversions could play a part in the city's resurgence.

Highlights

San Francisco is facing an empty office problem with 27.1 million square feet of vacant space.

The vacant office space is equivalent to nearly 20 Salesforce Towers.

San Francisco's downtown, once vibrant, is now suffering from emptiness.

The city is experiencing a significant surplus of office space that will take years to work off.

The pandemic has led to a shift in workspaces, with many businesses opting for remote work.

San Francisco's office vacancy rate has risen to 25% from a pre-pandemic rate of about 4%.

The city is facing an over $700 million budget deficit due to the challenges of empty office spaces.

San Francisco is now known as the work-from-home capital of America, with 46% of workers working from home in 2021.

The local economy is suffering as office vacancies continue to rise.

San Francisco is considering converting empty office buildings into residential units to address the housing crisis.

The city has adopted the Housing Element, aiming to build 82,000 units of housing by 2031.

Office-to-residential conversion could be a long-term solution to address both the housing deficit and office surplus.

Many developers lack incentives to build more housing due to high construction costs and strict regulatory policies.

Calgary, Canada, is successfully converting office spaces into housing to revitalize its downtown core.

San Francisco has not yet received applications for office-to-residential conversions but is engaging with the business community.

The city is considering lowering affordable housing requirements to make residential projects more feasible.

San Francisco's resilience is highlighted, with expectations for a strong comeback and innovative solutions like office conversions.

Transcripts

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.