Two of San Francisco’s biggest problems: office vacancies and housing

San Francisco is facing its highest office vacancy rate since 1993. Commercial real estate firm CBRE said in a recent report that 27.1 million square feet are currently vacant out of a total of 90 million square feet.

“The problem started with the pandemic,” said Colin Yasukochi, executive director of CBRE at the Tech Insights Center. “Before the pandemic, our office vacancy rate in the city of San Francisco was around 4%. That meant 4% of the total space, the millions and millions of square feet of space that we had in the city, was empty. Today that number is closer to 26%.”

As remote work becomes more popular, the problem is only expected to get worse. San Francisco has been dubbed the work-from-home capital of the United States, with the American Community Survey finding that 46% of San Francisco employees were working from home in 2021, up from 7% in 2019.

To counter the rising office vacancy rate, a local legislator is pushing for vacant office buildings to be converted into residential buildings. Matt Haney, a member of the Democratic State Assembly, says solving the problem of vacant offices could help the city take much-needed steps to address the housing crisis.

“What we cannot do is just leave these buildings empty. That would be bad for downtown our city. It would be a total waste,” Haney said. “There are some obvious things that we can look at where we can meet some of our other needs and actually solve another problem that we have and that is our housing crisis.”

As part of the housing element, the state of California mandates that San Francisco build 82,000 new housing units by 2031, including affordable units for low-income residents. To achieve this goal, the city must build 10,000 housing units per year starting next year. However, San Francisco Mayor London Breed believes the task is easier said than done due to a lack of support from local lawmakers.

“It will require us to make some major changes that I know our legislature will not be open to,” Breed said. “But if they don’t, what will happen? Government support for affordable housing will be taken away. Tax credits and all the fun things we do to support the ability to build homes in San Francisco in the first place will be picked up.”

The latest CBRE report, released in early December, says office vacancies hit a nearly 30-year high in the third quarter, with a vacancy rate of 25.5%. And these rising vacancy rates are having a major impact on the city’s economy.

“We are facing a budget deficit of over $700 million, largely due to the challenges surrounding our vacant office space, and we are seeing businesses in the financial district closing,” Breed said.

CBRE data showed that so far in 2022, 42 office conversions have been completed in the US, but only 17% of them are to apartment buildings, while 46% were office-to-laboratory conversions.

“The rents you can get for life science lab space are much higher than for office space. So that makes this conversion financially viable,” Yasukochi said. “We still have high demand for housing, but not at the price it would take for a developer to be able to do this from a financial perspective.”

In current market conditions, many developers lack incentives to build homes, and strict housing regulations often mean developers go through lengthy processes that can turn a profitable project into one that costs money and time.

In many cases, however, developers have already reached the point where they are investing in costly upgrades. Office conversions typically take place in older C-class buildings in need of major repair and conversion work, and often in awkward locations. While an office-to-residential conversion may require the demolition of a building, in most cases it’s still much cheaper than building from scratch.

“The important thing from a developer’s perspective is what makes the most financial sense,” said Marc Babsin, president of Emerald Fund, a real estate development company that completed one of the largest office-to-residential conversions in the city, with 100 vans on Ness Ave.

“There are many things that stand in the way of converting offices into apartments. The biggest thing is that the numbers don’t work today because the construction costs are so high. There are things the government could do to make it easier. said Babsin.

The mayor of San Francisco said the problem is that housing takes a long time to build, especially with all the demands.

“We already have so many laws on the books in terms of height restrictions, in terms of open space, in terms of unit counts, and in terms of everything you have to do to build,” Breed said. “And on top of that, we let people go through an insane process that takes an extremely long time.”

Although the office-to-apartment conversion is seen as a step in the right direction to address San Francisco’s housing shortage, it’s still years away from a solution. Breed says the city definitely needs to build more housing.

“We just need all the apartments,” she said. “You know affordable housing sounds good, but when you go through the process of accessing affordable housing in this city, it’s difficult and really, really challenging. And the system that we tried to work under state and federal laws was very, very difficult. And as far as I’m concerned, we have to be as aggressive as possible to build more homes.

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