Developers Welcome San Francisco Adaptive Reuse Measure, But It's No Panacea

San Francisco architects and developers are encouraged by an ordinance passed by the city’s Board of Supervisors this week that will waive some fees for converting offices into apartments. 

But while the ordinance will save money and make more conversions possible, such projects are complex and will still require substantial planning and investment, making a conversion boom unlikely.

“It’s about birthing a new generation of uses with the mission of redefining certain neighborhoods that can also create a more resilient and vibrant San Francisco,” Presidio Bay Ventures Chief Operating Officer Kabir Seth told Bisnow by email. “However, this is not a simple transition and there are several financial and operational hurdles that will prevent much of this from happening, even with the proposed measures, without deeper support from local and state legislation to ensure the feasibility of these efforts.”  

The San Francisco Board of Supervisors last week approved a resolution waiving development impact and inclusionary fees, which are typically the largest financial burdens for converting properties. City officials estimate that these changes could save developers between $70K and $90K per housing unit.

The bill still requires a signature from Mayor Daniel Lurie, who co-sponsored it.  

 “We have about 35M SF of vacant office space in San Francisco, and we think about 10-13M SF of that office was functionally obsolete before the pandemic,” said Anne Taupier, director of development at the office of economic and workforce development for the city of San Francisco. “We don’t see that as coming back online as office in any future, so we do think adaptive reuse is critical in how we take that space off the market and at the same time, create a 24/7 economy in our downtown.”

The new legislation makes it easier to undertake traditionally complex and costly projects capped at 7M SF. Additionally, it will extend the application deadline for a city program that simplifies the approval process by relaxing zoning and building regulations for converting office spaces into housing.  

City leaders are focusing on revitalizing downtown by converting vacant office buildings, responding to a record vacancy rate of 36.9%. While existing zoning laws permit housing development, previous planning codes have not expressly encouraged these conversions. 

In addition to removing vacant offices, city officials also hope to boost housing stock. 

The city predicts it can add between 10,000 and 14,000 new residents in the downtown area. That will go a long way towards San Francisco’s goal of building 82,000 housing units by 2031, which the Board of Supervisors mandated in 2023, according to a report in the San Francisco Examiner.

Any new project will still have to be approved by the planning department and meet the same safety and code standards that exist. Projects approved prior to this year that have not yet received construction permits may also request modifications to their development impact fees. 

But the ordinance wouldn’t be a silver bullet for conversions, which have been discussed nationwide as a solution for the problems plaguing urban cores but are notoriously difficult to execute.  

In addition to the technical difficulty and expense of conversions, there are market forces at play as well. Perhaps the highest hurdle to clear is the reputation San Francisco has acquired since the pandemic. 

“The key to getting any of this to work is to convince the equity markets that it’s OK to come to San Francisco, that’s the critical issue,” Forge Development CEO Richard Hannum said. “How do we create a policy structure that is inviting? Unfortunately, the media has portrayed San Francisco as being in a doom loop. It was once the No. 1 place to invest money in the country for decades and then it became a pariah during the pandemic.” 

Hannum’s company is working on perhaps the highest-profile conversion in San Francisco: the transformation of the 19-story Humboldt Bank building at 785 Market St. into a 125-unit apartment building.

Then there’s the possibility that office owners will keep holding out for an expected market rebound as the year goes on. 

“With the price of office buildings going down, landlords will be more hopeful that they can still lease their buildings, which is much more lucrative than conversions,” said Courtney Miller, principal of Ecobuild Architects. “But that hope is mostly in the Class-A buildings.”

As for reducing office vacancy, the ordinance is unlikely to make much of a dent, at least in the short term, according to Colin Yasukochi, executive director of CBRE’s Tech Insights Center.

He pointed to high construction costs and constrained financing in the residential market making many projects unfeasible. However, he believes that establishing these incentives could help address the surplus of obsolete inventory in five to 10 years.

In the end, the risk factor of getting into conversions will continue to play a role in limiting how many projects emerge, even after the ordinance is signed, according to Bora Ozturk, founder and general partner at March Capital Management.

Ozturk has looked into conversions in the past and says things are moving in the right direction, but he doesn’t believe that simply waiving fees is going to do much because there isn’t much of a community present for those that would try it.

In addition, it takes more than apartment buildings to create a community, he said.  

“I like that they’re trying, but there are no schools, there are no grocery shops and there’s no parking for families, so who are you bringing in that’s going to pay something comparable to a neighborhood like Cow Hollow or Sunset? You need to attract demand to make these conversions viable,” Ozturk said. “The more you do them, the more you will have those elements, but for the first movers, they’re taking a big gamble that tenants will come.”